Charts, Fears and Fallibility

Jim and Jeff watched Wednesday as AOL broke support level after support level. But the big breakdown didn't happen.
Author:
Publish date:

Looks like people got short

America Online

(AOL)

right when the chartists were buzzing about next stop 90. It's always like that with the Net. As soon as it looks like it is really rolling over, short-sellers, looking for that long-awaited killing, just come in swarms.

I could see them circling like buzzards over AOL when the stock plunged through 110. They were pushing, prodding, leaning all the way down, and when the stock hit out stops, the short-sellers came tumbling down with it.

That's exactly when you had to pounce.

The trading in AOL Wednesday was everything that I love and hate about charts, all wrapped up in one session. For instance, at our morning meeting I mentioned to

Jeff Berkowitz

, my partner, that

Gary B. Smith

said that the stock, if it

violates support, could be a true goner, with support being 110.

Sure enough, at 111, Berko said that even though we were using a two-point scale to buy 2500 AOL, we better hang back because the stock could really tumble if it takes out 110. Next thing you know the stock is at 108 and we are shaking our heads.

Good call Jeff!

But we didn't buy. We felt paralyzed by the idea that the stock could then trade to 90, the next support level. We passed on buying at 108, 107, 106 and 105. Again, we feared the "big breakdown."

Next thing you know, the stock is back at 110, and reluctantly we return to our scale and buy 2500. Had I not known about the chart, I would have bought 2500 every two points down and gotten a great average.

Because I was so conscious of the potential for the bigger breakdown, I ended up missing great prices all the way down.

For me, the trick, which I am still trying to master, is integrating the knowledge of the drop that is coming with the possibility of much better prices if the stock reverses. Which is why, in the end, I come back to my scale buying. It allows me to build positions at better and better prices for stocks I believe in. And it eliminates fear and fallibility, the two biggest drawbacks to good trading in a volatile tape.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long AOL. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

letters@thestreet.com.