Expand this one-year weekly chart of PRFT with 4, 8 and 21-EMA and then step back from the screen and look at it very closely. Then say out loud to yourself when, if you were going to buy this stock, you should have bought it. (Hopefully you picked the fourth week in August).
This particular pattern occurs over and over again in almost every stock you might want to buy. When you see a rising stock such as this consolidate simply draw a couple of lines on it as I show in the next figure then when the breakout occurs pounce.
The key factor is that the stock gets too far away from its EMA-21 and goes back to visit. In fact it just did it again. Because I know that many folks use a simple moving average for TA I printed it with the MA 20.
You can see that the MA 20 and EMA 21 on the weekly charts are very close to one another. It’s just that I prefer the EMA 21 to the simple moving average for all time scales. The result remains consistent – you buy by price and when it hits certain moving averages it behaves as if it touched a hot stove.
The next figure shows the same stock for two years on a weekly basis. From this aspect you can see the original breakout clear as a bell. If you want to get a 10-bagger first you have to get a 1-bagger and in order to get a 1-bagger you have to buy breakouts. To buy breakouts you have to be patient and wait for the breakout to develop. Generally speaking if you use the weekly charts you won’t get as many switchbacks as you might if you use daily charts.
As an aside you can also see the several "crossing" entries that I wrote about in Monday's wrap. I’ve circled them - May 2005, again first week in Sept 2005, then again in Oct 2005, and finally in August 2006. Note that the confirmation didn’t come for a week later in 2006. It is permissible to skip a period in the longer period charts.
It is also true that if you use a longer period chart to make buy or sell decisions the trend that you find will last longer than it might have with the same set-up on a shorter period chart.
5 comments:
I'm glad my picks are good for educational purposes because they certainly haven't been making me the money I've expected.
That PRFT chart shows exactly what I was looking for in my IBD 100 strategy. It had a clear uptrend and was supported time and time again by its 20 day MA. The buy point I was targeting was that bounce off the hot stove you refer to. I still think it's a good strategy but I wasn't on top of the charts enough and lacked the discipline to sell as soon as the 20 day support gave way. I'm still holding it and consider the recent cross of the 20 day MA as bullish. I will dump it if it gets to $19 again by the way. Does that make sense?
On the weekly chart scribe a line from the high of the 3rd week in Nov to the high this week. Then another line from the low of the 3rd week in Dec to the low this week. Now you have a nice pennant. if breaks out of the pennant in either direction then your question is answered - if it breaks down - sell - if it breaks up buy more or hold.
To answer your question with a question - if the stock is going your way why not keep it? Just set a stop.
Good question. I think it comes down to the personal choice of whether you would rather sell too soon or too late. Given the choice I've always preferred to sell too soon for some reason. Maybe it's just a quirky psychological thing, but it feels better to me to sell on the way up than when it starts to pull back. I plan to experiment with that exact thing, by the way.
By the way I sold PRFT today at $19 with it up 8% + on the day. It
will be a good test case for selling too soon...
Some electricfing charts.
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