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Thank you for the added perspective Gitanshu. It was quite useful.
Stepping back and looking at the big picture is a skill that I need to
develop. I also need to stop trying to pick tops and bottoms and fight
trends.
Thanks again,
Dan
>From: "Gitanshu Buch" <onwingsofeagles@xxxxxxxxxxxxx>
>Reply-To: realtraders@xxxxxxxxxxx
>To: <realtraders@xxxxxxxxxxx>
>Subject: [RT] Re: Boeing crashes and burns
>Date: Mon, 11 Dec 2000 13:24:32 -0500
>
>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
><< BA.gif >>
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