This column was originally published on RealMoney on Aug. 23 at 11:00 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
A lot of folks have been emailing me regarding some recent comments I made to Herb Greenberg about momentum investing, a topic he discussed yesterday on
One of the main points I made was that most momentum investors fail to ask the right question, and that is: "Who is left to buy this stock?"
Everybody has some underlying reason for buying a stock -- even if it's nothing more than the same reflex we see in largemouth bass when they snap at a shiny object. You always have
reason for buying the stock.
But if you are hardwired toward buying stocks with high momentum, you've always got to question your timing.
Are you very late in the trend, or are you just catching the first wave of the advance? You'll know by looking at the chart.
Compare the current price with the price of the effective base. How much higher is it? How long has the stock been moving up without a break? Is the slope of the trend accelerating to the upside?
These are all questions that help you learn whether anyone with significant buying power is really behind you. If you look back and there's no one there, your trade is defining the top. That's not good.
But it's still possible to trade momentum with less risk than most traders endure. It's simple -- set trailing stops.
Even if you are late in the game with a questionable crowd behind you, a properly sized position combined with a rigid stop loss will decrease your risk to an acceptable level.
What if you get stopped out prematurely? Well, tough. That's trading.
If you feel that strongly about the stock, then buy it again. However, I guarantee that you will look back more often at the times you were stopped out and be happy for cutting your loss short than you will be regretful for not letting your profit run.
If you are failing to consider who is behind you, then your attention will be diverted during those times when you are the last one in the checkout line.
Let's look at some reader picks with this idea in mind.
Last time we looked at
was a few weeks ago, when it was at $35. I put it in the "too late to sell, but too early to buy" category. The bears took the stock down a couple of more bucks, but you can see by this high-volume reversal that we've got to recategorize the stock.
From the look of this tight little congestion, Qualcomm looks like it's too early to sell, but not too late to buy. It looks to me like there are plenty of folks to buy Qualcomm -- many of whom have been selling it on the way down. If you're long from before last week's breakaway gap, you might consider putting a stop just below support to protect your gains. When Qualcomm pulls back, keep an eye on the August low -- we'll need to see a higher low if this rally is going to have any legs.
A reader asked for my take on
. I last checked in on BOT in early July when the stock was at $121. The picture has not changed that much since then, except that the stock has once again failed at established resistance.
This is a stock in search of a base. The only one it has found this year is clear down at $85. I sure wouldn't want to hold this stock for a $32 decline just to find out that prior support is going to fail. Instead, I'd stand aside now and watch from the sidelines.
If you're a buyer, who is behind you? As I look at this chart, I just see a bunch of sellers. Short term, the stock does look ripe for a minor bounce. But beyond the next few days, the path of least resistance is south.
When you look at BOT, you've also got to look at
Chicago Mercantile Exchange Holdings
. They're in the same business. Here, we see that my
2005 Summer Stock hasn't weathered this summer as well as it did the last couple of years.
The bulls have twice been turned away at $500, and the most recent advance didn't even make it that far. So this current test of support is important. After the recent lower high, any move below $450 establishes a lower low. That's what happens to stocks when their uptrend ends.
typically trades about 400,000 shares each day, but the past few trading sessions have seen more than a million shares change hands. I've highlighted the volatility squeeze that has been in place during the entire month of August. Resistance had been at $3.50, but the stock has effectively blown through that level on quite heavy volume.
Compare the base that supports the current test of $3.75 with the base that supported the July test of $3.75. Back in July, the bulls pushed the stock up fully 50% -- from $2.50 to $3.75. On this recent test, the stock is higher by just 7%. So my bet is that the proximity of the base will delay any significant profit-taking and will enable the stock to move higher from here.
was a stellar performer during 2004 and 2005. But this year, the bloom has certainly come off the rose. Now, the underlying company might be going great guns, but I've recently emphasized the importance of
distinguishing between a company and its stock.
Here, the stock is being distributed into each advance. I wouldn't be a buyer until it either successfully tests the support line drawn above or breaks the series of lower highs and lows. If you love Nabors Industries, then you're likely to have a chance to buy the stock at lower levels.
Be careful out there.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Syntax-Brillian 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.
At the time of publication, Fitzpatrick had no positions in stocks mentioned, though positions may change at any time.
Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account in Encinitas, Calif. He is a former co-manager of a hedge fund and teaches seminars on technical analysis, options trading and asset-protection strategies for traders and business owners. Fitzpatrick graduated from the McGeorge School of Law and was a fellow at the Pacific Legal Foundation, a nonprofit public interest firm specializing in constitutional law. He also practiced law in the private sector before pursuing trading as a full-time career. 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;
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