May 30th, 2008

An Important Lesson Learned: JCG

Ouch! I tripped up and it stings, it hurts. I broke one of my unwritten rules which is to always wait for a confirming breakout of a consolidation or base formation before buying a stock. Just yesterday, I showed the JCG chart and wrote:

“…symmetrical triangles aren’t reliable bases. But I also said that they were more reliable as consolidation patterns. This is exactly what the JCG symmetrical triangle above looks like to me. What’s most important is the direction both those stocks were trending before starting to form their triangles — BAC was trending down while JCG was trending up. If the market continues to improve and the Apparel Group continues ascending in ranking among the industry groups, JCG has a strong chance of matching the double it made before the triangle and move all the way to the 80-90 range.”

I got carried away and focused on the opportunity I thought I saw and totally ignored the risks; it should have been the other way around. Someone once said, “watch the risks and the rewards will take care of themselves”. I forgot about all the caution mentioned on May 6 when I repeated some quotes from the site Trading Quotes (in the linkfarm, “Blogs I Read”, to the right).

So, after the close last night, as reported on, J Crew “posted a 24% rise in fiscal first-quarter profit, but shares of the retailer plunged after hours as it issued second-quarter guidance well below Wall Street’s expectations and reduced its full-year forecast as it struggles with the slowdown in consumer spending that is hurting other retailers”.

This bad experience underscores several lessons:

  • Prices are set by expectations, not by actual financial results. It’s the earnings and growth consensus and the “Whisper Numbers” that determine price..facts have little to do with it. It doesn’t matter that the company still “expects net-square-footage expansion of about 11% and direct sales growth in the high single-digits this fiscal year”. The only thing that matters is the guesses and exectations the “herd on the Street” — the rationalizations — use to justify their reasons for buying or selling.
  • I, for one, would rather rely instead on momentum, actually seeing a stock move up because of increasing demand for whatever the reason rather than on some rationalized numbers exercise. Let me see the trades pushing the price higher; I don’t really care why it’s going higher because that could change on a whim.
  • Wait, wait, wait for confirmation in the form of a breakout (or breakdown) before acting.

So what to do now. There’s a huge gap down which, according to charting books and personal experiences says will need to be filled. But when and how long. It could take a couple of weeks or extend months. But without a doubt, the demand equilibrium in JCG has been upset and, if sellers don’t continue to force the price lower, a new consolidation pattern will emerge.

“Time is money”. Since there’s no telling how long this will take and there are stocks great momentum making new highs, I decided to take my lumps and sell.

(more tomorrow on breakouts vs. retesting)

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