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In addition to Earl's response to Dan I have the following perspectives to
offer on the pattern:
I've taken a rather longer term view of the Boeing cup, see chart.
Depending on length of congestion (or cup) one chose, one could use A or B
as the valid breakouts, and C or D as the matching handle lows.
Based on this chart the stock doesn't look damaged goods to me and has only
covered about a third of its potential move up.
The short handles (2-3 weekly bar pullbacks) did violate the absolute
pivots, not a preferred course of textbook fare.
The textbook recommends a 7-8% stop loss below the pivot, so hindsight tells
us one would not be stopped out in either A or B trade, and one would still
be long this - presumably with stops rolled up.
Oscillators on lesser timeframes (Daily etc) would have one start looking to
book profits, since divergences are getting pronounced with each
rally/pullback/rally sequence. But then the move is just getting started,
says big picture.
Trend following methods would have one stay long and even pyramid into
additional positions since most pullbacks are stopping at the 50 day moving
avg, even though the distance between current price and trend-following
support keeps widening with each thrust up (and this increases the
volatility of one's p&l line).
But these are money-mgt issues specific to the competing and often opposing
indicators, not pattern issues.
Given the length of the longer congestion (2+ years) I would be very
surprised if BA broke down from here (or at any stage since the breakout).
The general rule of thumb is, the longer the congestion the better the
"stickiness" of the breakout. The corrolary has to do with the number of
attempts it takes to make the breakout, the more the attempts to break out,
the lesser its chances of success in the short term. This is the predominant
feature I've noticed in failed breakouts, from INTC to NOK.
O'Neil also makes the case in his paper / books about "late stage breakouts
typically fail" - but if a company has been around for 25 years, and we're
looking at a breakout in Year 5 or 10 or 15, how can we say this is "late
stage" or mid stage or the fun is just starting?
There is, therefore, considerable latitude to the person visualizing the
breakout.
What has happened in the recent past is that the post-breakout % or $$ move
has all been captured by a very few bars relative to the time it took to
make the length of the cup - examples that come to mind are LEH and JPM -
and MRK. So if one wasn't stalking the stocks and if one didn't have resting
buy-stops in place before the breakout, one would reasonably have stood
aside waiting for the pullback to pivot that never happened.
In other cases, the thrust from the handle has been rather slow (eg - PEP,
BUD) and/or the pullback to pivot has in fact violated the pivot - leading
one to either abandon the pattern in favor of faster moving stocks or in
favor of disbelief in the pattern.
Must be the nature of the varied popularity of the pattern or the
desperateness of hot money finding relatively cold blooded momentum, but I'm
just guessing.
I don't know if this pattern can be made into a scientific cause-effect
relationship since it gets applied to underlying securities across the
spectrum of fundamental influences in the stocks/industries that make the
breakouts.
Bottomline is that if something is defying gravity and making it into the
New High list with volume to back it up, it "should" go up.
The element of surprise is therefore in its failure to go up, and should be
allocated "sit up and take notice" status - and for the early bird, maybe a
fade the breakout trade.
It is to be assumed that everybody that trades this pattern, knows both the
preferred way and the surprised way - and does something about it. This
probably results in noise at the breakout pivot level as competing
influences duke it out to create - for examples - the pullback below pivot
(stops out the purists), the handle on not falling volume (purists chicken
out), the lack of handle but the confirmed takeoff (purists never get in) -
and other variants - to which my response has been to combine underlying
positions with options to define my risk & time commitment rather than to
widen the stop loss to accomodate market noise.
There is also the magnitude of the daily trading ranges - on a % basis, the
daily trade in a BRCM may replicate that of BA but the financial impact and
the trading games people play with both are not really comparable even
though both may sport the same picture. BRCM may be under-owned, BA may be
over-owned. BA's chart will act thicker than BRCM. BRCM may fall 50% from
its high to the depth of the cup, but it is a $140 move while BA falls "only
$30" yet it is the same 50% off the $60 high.
In reading the literature, I believe the pattern was meant to isolate the
"growth stocks + growth co's" of any new bull leg. Growth, I believe, was
fundamental, the explosion of consecutive earnings and revenue numbers being
mispriced into the market as the cup formed and then the market reaching the
point of recognition where supply supposedly evaporates and demand kicks in
big time, creating the breakout, and then the follow-through as demand
consistently crowds out the supply. thus bidding up prices.
We the trader have taken the concept and applied it across the board to
everything that congests and explodes even though the underlying business
grows 5% a year in a universe meant to isolate those businesses that grow
125% - usually when nothing in the growth complex is setting up the picture
but we are very comfortable trading the picture so we might as well find a
market for our skills. This mass-scale misuse probably creates its own
impact on the resultant chart patterns.
Everything tends to "grow" at some point in the cycle - recently we had tons
of utilities and bonds breaking out, before that the foods & beverages broke
out, before which the drugs broke out, all while tech was getting slammed.
Meantime, tech continues to sport the best % consecutive fundamental growth
while everything else is - as they say - "for a trade".
If there is a science to this, then it must be in identifying that group
rotation from the composite of the new highs that exhibit these patterns -
and extrapolating that identification into where the stock market is voting
regarding the state of the current phase of the economic cycle -- possibly
with a six-ten month future horizon.
Thus, one would understand that early expansion companies like home
builders, mortgage finance lenders/consolidators, most regional banks &
savings/loans, restaurants, and specialty retailers make up the current
list. Every one of these companies benefits from a POTENTIAL drop in
interest rates. Meantime, the recession type stocks drug/food stocks are in
decline, coincident with the rise in the Fannie Maes and the Mellons and the
Brinkers - this pattern seems to indicate that the market projects a lack of
recession a few months out, and the market would be surprised if this were
otherwise. Just the way history would have behaved, only the players are
different.
One would note that the "growth" phrase is missing from the above - after
all, who would expect a Fannie Mae to do well when one sees a TV headline
blaring "Lowes warning of lower sales due to slow down in housing starts" or
something like that.
But for most of the stocks that make up the non-growth group, these are
better bought at the bottom of the cup than at the top - of course,
blasphemy to the breakout buyer and common sense to the value-conscious
buyer - but the bulk of the %age gains come from the ride up the right side
of the cup, and not from the subsequent breakout.
Then there is the element of churn & psychology. For every JPM or LEH that
took off, there were 2 and even 3 that didn't. Going into the trade, how was
one to "know" that correct pick? Also, if one took each trade as it came up
and then robotically churned the account due to frequent stop outs or lack
of brutal takeoffs, where would one find the psychology to ride the one that
really took off after some initial sluggishness?
Finally, where one gets a 10% up move in one day, why would one have
patience to ride up 10% in 2 months?
Are all questions that I thought about along the various journeys up CANSLIM
trees.
It has been a fascinating bunch of questions that sprung up as the pattern
became more familiar to me... and at the end of it all, for me it boils down
to applying it to what it was meant for and staying in cash when nothing
that it was meant for sets up, else being aware of the deviation from the
norm and expecting less perfect responses from the chart.
Gitanshu
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