This column was originally published on RealMoney on Feb. 9 at 1:00 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
Wednesday's article prompted an amazing amount of email from readers who swore I was writing about them. Lots of traders catch the "can't help its" at the end of a big advance.
They've profited handsomely from a strong market, but instead of protecting their profits, they just have to jump in for one last trade -- and get clobbered.
Krish wrote: "It seems like good picks are nothing if you don't have the trading discipline. It's like good picking is 30% of the battle, and the rest is discipline."
Krish makes an excellent point. The key to good stock picking is to find good stocks before the herd catches on. The stereotypical "good stock" has a great-looking chart. It has gone from $10 up to $40 within the past three months. Man, wouldn't I love to find one of those ... three months ago.
Here's the point. As the chart gets prettier and prettier, the risk-reward aspect of the trade deteriorates rapidly. It's the widespread buying that creates this pretty picture. It's too late to safely capitalize on the trade -- it's already been discovered by the masses, and only the
slow traders are left to buy.
And those last-to-the-party traders have minimal capital. They buy enough to take the early birds out of their positions at a handsome profit, but not enough to keep the trend going and make you money.
Work hard to be a good stock picker. But after you pick those good stocks, work even harder at maintaining discipline. Strong discipline 90% of the time is not enough because that last 10% of impulse trading will kill you.
Many readers have been asking about the oil and gas industry -- let's look at some of the major players.
weekly chart shows an obvious uptrend. This is a good-looking chart, right? Wrong. The fundamentals of the company are great, and the stock will likely be higher sometime soon. But here's the question that we should always ask ourselves before we buy a stock: Who is on the other side of my trade?
The last two weeks have seen declines. Great company, great-looking chart, but there are no fresh buyers. The current weakness is simply due to the generous supply of stock offered by those who bought at much lower levels. Let 'em sell to someone else. The last breakout of any significance was down at $100 -- that's a $20 haircut from current prices. Be disciplined and wait for a lower-risk entry.
What's the difference between this weekly chart of
and Schlumberger? Only the price. The charts are nearly identical, which leads to the same recommendation -- wait for a retest of the breakout level. If it pulls back to test the low $60s, then take some stock.
is a bit earlier in its breakout pattern. In early January, it pushed to a new 52-week high, but over the past couple of weeks, this breakout has been laboring, with last week's pullback occurring on heavy volume. On the plus side, prior resistance at $70 is holding as support. If you're long, there's no sense in selling yet. I'd hold the stock unless it falls into the $60s.
Cal Dive International
is in a multiyear uptrend, but the stock has really been cycling between the middle and upper Bollinger Bands. At present, the bears are pushing the price lower, and stochastics confirm the decline. I'd look to buy if the stock tags the middle Bollinger Band, with a stop just beneath that level.
looks very similar to Cal Dive. The price continues to advance, with regular pullbacks to the middle of the Bollinger Band trading channel. On each of the last three pullbacks, the stochastics have fallen beneath the midline. If this trend continues, then the stock still has a bit more work to do on the downside. I'd wait for the first higher close on this weekly chart before buying.
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 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;
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