October 23, 2007 at 7:34 am | | Comments 0

When Character Changes

Anytime we see a big contra-trend move like we got last Friday, the discussions begin….

Was it the end of the trend? Is this just another dip to be bought? Is the world ending?

Those questions arise for the overall market, but also for individual stocks. In reference to the stocks, the answer to all 3 questions is yes, depending of course on the stock in question.

Whenever I am considering whether a dip is buyable, the most important aspect of the stock to evaluate is whether the character has completely changed or not. Some stocks go through a minor character change when they see a minor dip in the midst of a strong uptrend, but others will reverse course sharply and never look back. The latter kind is what I want to avoid like the plague!

As you begin to work your watch list and seek out potential long-sided plays in the days ahead, take careful note of just how intense the dips are. Doing so will greatly assist you in deciding whether a buy is warranted, or if instead you need to keep waiting for a better opportunity.

Let’s look at a couple of examples.

MMM was trending nicely higher recently, climbing and basing on the way up in a healthy fashion. This stock’s ability to put in rest helped it keep climbing without getting too extended. A couple of weeks ago, MMM began to pull back gradually, but the uptrend was still intact. This stock actually had found support just above an old base, but then came Friday’s sharp move lower on heavy volume. The big spike down was followed by more weakness on Monday, and needless to say this chart no longer resembles an uptrend. As a result, I’ll avoid buying anything that looks like this.

(Click for full-size image, courtesy of TeleChart)

NUAN has been trending higher the past few months, and this stock also recently began a pullback. It also took a dip on Friday (and Monday temporarily), but the character of the stock was not affected. The pace of the pullback has remained constant, as is evident by the trend line just overhead. This is the kind of setup which I would consider putting on watch for a potential long-sided play once things shape up (and if it could clear the trend line). Stocks which may be impacted by widespread selling pressure but which still hold up relatively well are the only stocks worth looking at once the storm passes.

(Click for full-size image, courtesy of TeleChart)

Be careful out there with new buys, and pay close attention to the character of your stocks! If the intensity of their pullbacks worsen considerably, cross them off your list of buy candidates and move on to the next good setup.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

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