April 29th, 2011

Compelling Examples for Buying on Breakouts

When it comes to stocks, it’s easier being a buyer than a seller. As subscribers to my Instant Alerts know, when I look for investment ideas I first try to determine whether the market is trending or if it is stuck in a trading range. Next, I search for stocks that have not yet but are about to break or have broken above significant (meaning, longer-term) resistance levels. I especially like stocks moving into all-time new high territory. Once I find such a stock, I will try to hold on to it as long as I can; I try to hold the stock until I’m compelled but weakness in the overall market to begin moving onto the sidelines.

Perhaps a few examples since this phase of the bull market began in August, 2010, demonstrate how this strategy actually worked (click on images to enlarge):

  • MWIV – the stock that’s been in the portfolio the longest was purchased on 6/1/10 after it broke into all-time new high territory. Since then the stock has appreciated 70.8%.
  • ENSG – was purchased on 11/3/10 as this stock also broke into all-time new high territory five months after MWIV. It has since appreciated 60.6% in 127 trading days.
  • SRZ – purchased on 12/14/10 as it broke out of a year-long “buyers’ remorse” trading range consolidation after it’s break above the neckline. Since it’s a low-priced stock, it’s 90.9% appreciation has been more substantial.
  • LNG – broke above the neckline of a 2 1/2 year-long triple-bottom reversal formation in December, 2010. After returning to test the support at that neckline, the stock surged ahead 62% over 20 trading days. Recently, it’s in a consolidation and might be forming what eventually turns out to be a symmetrical triangle pattern.

I have many other examples since there are close to 90 stocks in the Portfolio. With more and more stocks crossing above these logical entry points as the market continues forging ahead, however, it becomes harder and harder finding new acquisition candidates.

The question now is how significant is the risk from jumping on “a train that’s already left the station?” If you had new money to put to work, should you still buy MWIV, ENSG, SRZ or LNG or any other stock that’s past a breakout and already in an uptrend? If potential owners are asking this question and answering that it’s too risky, should existing owners be asking the question of whether continuing to hold those and similar stocks is also too risky.

The striking difference between buying and selling stocks is that while there can be many different entry points based on industry group and individual stock dynamics, exit points tend to be driven by from external economic factors that impact the whole market and most stocks simultaneously (think back to the Financial Crisis Crash).

It brings to mind the old saying that the difference between stock market winners and losers isn’t how much money they make but how little they lose. So as you look for stocks with good entry points never lose sight of the total market’s trend.

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  • Anonymous

    Great post! What would be your average hold time for stocks?


  • Joe

    My guess is that my average holding time is 6 months but it can run from just a few weeks for a stock that fails to perform as expected up to 9-12 mos. for true momentum stocks. When you tell me how long the usual market uptrend lasts I'll be able to tell you the longest time I hold a stock.