No Bottom Fishing Here

For many of you, this column couldn't come soon enough. "Gary, please tell me what I should buy right now." "Gary, please tell me how I can buy right now." "Gary, what are some great techniques to pick the bottom?"

Unfortunately, few people have asked me "Should I buy right now?" I mean, seriously, there are about eight months left in the year. You don't need to catch the exact bottom to still have a fabulous year. In fact, you don't even need to catch anything close to a bottom to have a fabulous year.

Who even wants to call a bottom? I'd rather give up a few percentage points on the downside and be in a safer position, than make guess after guess thinking, "Today just has to be the day!"

Look, I don't mean to be Mr. Negative, but let me give you a pop quiz. True or False: Buying at the close of the Oct. 29, 1929 crash would have been the perfect time to go fully long?

OK, before you answer, I'll give you some hints. The 29th was a major, monumental blowoff, right? And I'll give you another hint: The next day was a huge up day.

So you went long, right? Great. Well done, you savvy buyer! (I'll assume you went long "the Dow" although technically that was impossible at that time. However, it's a good enough proxy for my example.)

The only problem is that by Nov. 13, 1929, you're down 14%.

Oh, but you're a buy and holder, right? Well, by June 7, 1932, you're now down 79%.

So, my point is not that this is 1929. No, my point is that as tempting as it looks, not every "monumental bad day" is a "perfect buying opportunity." Maybe this is 1929, or maybe it is 1987. Really, I have no idea, and that's why, again, I'd rather miss a few points of upside and err on the side of safety than flail away, hoping and praying I bought at or near the very bottom.

(A note here, for those of you branding me as "bear." I am neither bear nor bull, but if I do anything, I root for the market, as I and my sweet wife have plenty of compensation tied up in unvested stock options. So, I'd like nothing better than a rising market to carry our little boats higher. That said, if you're looking for an eternal optimist, you've come to the wrong place. Here you will find an eternal realist!)

Now that we have that out of the way, what kind of charts would have me buying right now? There are only two: a trendline break and an upward break from congestion. Let me show you a few examples of each and a few nonexamples of each.

First the trendline breaks. Before I begin, though, many longtime readers may recall these as the "Wesson 45." What you might also recall, though, is that I stopped trading these because they always turned out to be a lower-odds trade. You will find a lot more of these at bottoms than you will the safer congestion breakouts.

OK, let's look at Apple Computer (AAPL Quote) as an example of a stock that has had both the tradable kind of trendline breaks and the kind I'd also avoid.

Remember -- on trendline breaks, look first for a trendline that is, indeed, broken; and also make sure the move up has a good deal of volume behind it.

As for exits, that's your call on the profit side. I like to take a standard 5%, but that's personal preference. As for stops, again, there's a variety of ways to go. One approach that works is to put your initial stop below the breakout candle. If the stock falls back that far, invariably, the trade won't work.

The other type of long I like is the GBS bread-and-butter breakout from congestion. Nothing fancy here, and you've seen this a million times. The only difference is that breakouts like these are less reliable than normal. That is unless the market has, in fact, returned to bullishness.

I haven't seen any come out of the recent downturn yet. But, I did see a lot after the October 1999 turnaround and one just before last week's crash. Here are three of my favorites:

On the trade management of these, my standard 5% profit/6% loss has always worked well. However, there are as many methods here as there are charts. Just experiment a bit with what might work best for you.

So, those are the two types of longs I'd recommend; but you'll notice I skipped a bunch of others. As an example, I generally don't like to buy at support or at trendline, although I have tried it. (You saw me try it last week with Cisco (CSCO Quote), in fact.) Those are generally low-odds plays, which I don't think are worth taking.

In fact, as a rule, I generally only buy stocks that have shown some kind of strength, whether it be a trendline break or congestion break. I've tried just about every other play, and my approach never gives the best payoff, but invariably presents the best reward to risk.

Again, my point is: You don't have to be a hero and nail the bottom. If a stock is strong, there will be plenty of opportunities to nab a profit in the middle of its run. So, leave the heroics for someone else. Remember the old saw that happens to be true: There are old traders. There are bold traders. But, there are no old, bold traders.