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Often we are asked why the "consider buy" list generally has the
entry levels on stocks, "over" their current prices. Well, there are
two reasons really, lets look.
For the most part we list the consider buys as they approach near
term resistance levels. So, if you look at a six month chart and you
see XYZ is trading at 9.60 and it has a line of resistance at 10,
you will probably see us mention that we will consider being long
XYZ on a move over 10.10. Okay, that's easy enough, but the next
part isn't.
Take a day when when we open with a big "gap" which means the market
is opening at a higher level than it closed the session before.
Often an individual stock can gap over a dollar on a gap open. So,
as we take into account stocks we might be looking at as a "long
play" we also have to figure in the mood of the market overall.
If the market looks like it's going to put in a gap open, often a
stock will open above the intended target entry. This presents a
plethora of problems. Do you buy the gap? Do you wait for it to
fall? So. we often put a little extra "room" on the consider buy
price, to adjust for a gap open too.
Our way of dealing with gaps is we use the opening price level as a
gauge for entry. Let's say XYZ is 9.60, we like it long over 10, but
it opens at 10.50. Well once the initial excitement fades, often
those gaps collapse. So let's say XYZ trades down to 10.20 by 10 am.
Now what? If the market starts heading higher, you can be brave and
try and hop in when it starts heading higher, but it's fairly risky.
That opening price has now become a short term resistance.
We like to wait for the stock to exceed it's opening price on a gap
open. In fact we call it the "gap out" play. We generally won't go
long until the stock has clearly exceeded it's opening price. So,
when you look at a stock on our list and the "target" for entry is a
full dollar over where it's at the night you are reading the letter,
you have to remember, we are also trying to adjust for gap opens. We
hope that helps clarify the situation for you!
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