This column was originally published on RealMoney on Feb. 10 at 12:00 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
Last night, I had dinner with an old friend, Worth Gibson. Worth is an excellent money manager and a former writer for our sister site
. He's brought his family out to see the San Diego Supercross on Saturday. (Supercross races are the ones with motorcycles launching off small dirt ramps to fly 70 feet in the air.)
We discussed the merits of technical analysis, and whether there was a place for it in a value-oriented discipline. He noted that ignoring the price action of a stock inevitably leads to bad results. Even the most attractive fundamentals won't save you if the stock is falling like a brick.
I mentioned that my approach to trading and stock analysis is getting simpler, with a primary focus on remaining in phase with the prevailing trend of the stock.
Worth jumped on this and told me about a time his young daughter visited his office. She looked at a chart on a monitor of one of his holdings that had been selling off for a while. She studied the picture, pointed at the monitor and said, "Hey Daddy, that looks like a slide!"
Worth laughed and said that was when he realized that some of the first lessons we learn are the most useful. If we could all look at charts in the same way kids view them, we'd probably make a lot more money. We'd be searching for charts that look like Supercross ramps, and avoid charts that look like slides.
Let's look at some charts and try to avoid the slides.
I wrote last week that a
break of support at $400 for
was likely to lead to a decline to around $300. It's close to halfway there.
While the stock might be ripe for an oversold bounce, I'm not optimistic about this slide. After all, the
price-by-volume bars, in yellow, don't show much volume at the $320-$350 level. As such, the next wave of real buying is likely to occur much lower than the current price.
could still be simply consolidating an impressive run. Or, it could be in the early stages of a reversal. The $35 level has been supporting the stock since mid-2005. However, if support fails, this stock is likely to slide much lower -- down to $30.
Despite the wicked price action over the last week or so, the uptrend in
remains intact. Between October and the end of December, it moved steadily higher in a low-volatility trading channel. But in early January, the bulls launched the stock higher. It finally peaked last week and has fallen back to test the steeper support line. If you've been long during this decline, consider putting a stop just below the most recent support line. Odds are that Wednesday's intraday low marks the climax of selling pressure. If this trend line fails, I wouldn't want to be long.
has been retracing most of the advance that began in September, but notice how Wednesday's intraday reversal occurred on fairly heavy volume. A long tail (i.e., a wide range between the open/closing price and the intraday low) could be indicative of a selling climax. After all, the stock had been in decline since $65, and recently broke prior support at $57.50. The subsequent trend line break could have triggered a lot of stops that hastened the decline by flushing out all the weak hands holding the stock. If you're long, consider putting a stop just beneath Wednesday's low. I'd also consider buying UnitedHealth on a close above the resistance line drawn above.
has been in a mature uptrend that began in September, but over the past couple of weeks, the stock has reversed on expanding volatility. Stochastics are close to being oversold, which often leads to a bounce. I'd look for an oversold bounce from the current $22.50 level. If Friday's close is above yesterday's high, I'd say that the bulls are starting to dominate. If not, then I'd certainly sell. No sense jumping on a slide that has just begun to start moving.
Be careful out there.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Neoware Systems 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.
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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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