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I keep a long watch list of stocks that I've highlighted in my
columns, because some of my best learning experiences happen when I look in the rearview mirror.
How did those stocks trade? Did they behave as I expected? If they did, great; if not, I look to see if I missed something.
Today I'll take a look at a couple of stocks I recently highlighted:
I've looked at Aetna three times this week. On Monday it looked like a great long. By Wednesday it was obvious the breakout wasn't working. That's what we see in the following chart.
mentioned that it wasn't time to short Aetna because it hadn't yet broken down. Instead, I advised watching it for some follow-through. Here's what happened.
what I call a real breakout! So what's the takeaway? First, watch Aetna over the next few days. (I think it's a good long right now, with a stop at about $43 -- back in the trading range.) If it continues to trade higher, you'll see how rewarding it can be to trade these volatility squeezes. If it reverses again, you'll see how frustrating it can be to trade them.
Inherent in a dramatic increase in volatility is the risk associated with being on the wrong side of the move. So it's more important than ever to avoid reading too much into wide trading-range moves within the Bands. (These types of moves are evident in Aetna's charts from
Wednesday.) A tag isn't enough. Rather, the move must push beyond the Bollinger Band on volume. Aetna did that Thursday.
BioMarin was also highlighted in
Monday's column, which showed the action that ended Friday, March 7. Yes, it's moving higher now and looks quite strong. But the lesson here is what happened on Monday and Tuesday. Price pulled back below the midpoint of the breakout, but it never dropped below the 20-day moving average (the middle Bollinger Band).
For a great many traders, the best method is simply to set it and forget it. You enter the position, immediately establish your stop-loss and then just walk away. If you'd bought BioMarin expecting an immediate follow-through, you may have been shaken out, even though there was absolutely nothing wrong with the stock. It was just consolidating the breakout before continuing. I find that my trading results have actually improved when I've been too busy to watch the market all day. Why? No emotion -- just hard numbers that the stock either hits or doesn't.
looks very strong, having just broken above the 50-day moving average. A target of around $7 is possible -- not in a straight line -- but the path of least resistance appears to be up. I like this trade because the stop can be set so close. After all, the trading range is just slightly beneath Thursday's close. If Adaptec drops back into the trading range, you'd want to exit the trade rather than get stuck in sideways action.
is beneath the 50-day moving average, while Adaptec just broke above it. If Avnet can push above the 50-day moving average, then it should be clear sailing. But remember the lesson from the Aetna chart: A large range day within the Bollinger Bands doesn't make a breakout. Avnet is one to watch, but not one to go long just yet.
as a low-risk long right now. (Cody Willard has
mentioned the insider buying in this stock as well.) It showed up on my list of squeeze candidates last week, and I've been impressed at how this stock has remained in the upper 50% of the Bollinger Band range.
That's bullish, especially when combined with tight Bollinger Bands, bullish money flow and relative strength index and an improving accumulation-distribution line. The severe low in the accumulation-distribution line reveals the long duration of distribution, while the slight uptrend indicates this distribution is about complete.
Thursday's breakout confirms the end of steady distribution, and now may be the time to buy. Any pullback would be a gift.
, we can put it all together: a clean breakout from a volatility squeeze on heavy volume (just about average, but much heavier than on recent days).
These lessons are important to learn, but don't forget to put them into practice. Be careful out there.
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Dan Fitzpatrick is a freelance writer who trades for his own account. His columns focus on quantitative strategies for trading and investing. Fitzpatrick is a member of the Market Technicians Association and authors
The Stock Market Mentor, a newsletter focusing on the proper use of technical analysis for trading and investing. 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 welcomes your feedback and invites you to send it to