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Picking tops and bottoms is one of the quickest ways to go broke in this business.
Dan Harels wrote:
> 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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