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INM Nov '05 - Back Up! - Psychology After a Serious Shakeout
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
CANSLIM.net


One thing dealing with Hurricane Wilma has shown us who live in South Florida is that the pressure and stress of abnormal conditions makes many people lose their patience, and as a result, folks are sometimes unable to maintain their cool.  In a crisis you must be cool, just like “The Fonz” on the old television hit Happy Days, a role brilliantly played by Henry Winkler.

It is not easy to stay calm and cool when you see drastic downward action in a stock you own.  Of course, holding any sinking stock has its risks, and the 7-8% sell rule should remain every investor's “Rule #1”.  The best policy is usually to remove all doubt and sell, especially if you want to be sure about limiting losses before they become a more serious problem. It is very important to not make excuses day after day while a losing position continues to deteriorate. 

Over the years I have again and again pointed out to investors that earnings announcements can commonly lead to more excessive volume and volatility in stocks.  The wild action in HLEX on the two days following its latest financial report makes it an example worthy of closer study.  Of course, the present earnings reporting season has led many other issues to demonstrate similar trading characteristics - action that is very trying for investors.

Let me somewhat reluctantly speak of what might be called my "hold on loosely" rule.  It comes into effect whenever finding myself caught still holding a stock after a sharp sell-off, particularly when there has been a clear violation of key chart support (any technical "sell signal").  Since we know that the possibility for greater losses exists whenever we leave ourselves open, this is a general rule that simply says we must almost immediately see a prompt rebound that begins making repair to the technical damage.  Of course, each case is different, but in probably 95% of the cases I would not be willing to hold and wait more than one or two days to see definitive signs that institutional buying demand is coming in and providing support. To have any reason to hold a stock that is has taken a hit, we need some proof that the stock is finding support right away.  Otherwise it is too hard to justify holding a deteriorating stock, especially because new breakouts would likely have a better chance of paying off.

So, on those critical days that follow a breakdown, with a stock that then shows a lack of progress, we must sell. Even if it looks like the tough breakdown is only being followed by mild deterioration, we really must sell. If we see more obvious signs of critical deterioration continuing, then we definitely must sell.  What do we want to see?  The only thing that will justify holding – which is meaningful buying demand putting a prompt halt to the slide!  Endless excuses can be made whenever a leading stock fails to act well around key support levels.   Disciplined investors have learned that to be successful they cannot afford to make excuses and let losses grow larger.  If you choose to continue holding a sinking stock down more than 7-8%, you do so at your own peril.
 
Nice support showed up for HLEX on October 27th, immediately after a huge shakeout that resulted from the market reaction to the company’s latest quarterly financial report.  I handled several frustrated callers who were perturbed by the action.  The reality is that many investors are frustrated out of stocks by a "shake out" day.  We don’t always see heavier selling behind a quick technical breakdown. In some cases, support is found and the share prices quickly rise when very few anxious sellers remain.  This is why shakeouts are frequently a phenomenon that can bode well for the investors who had the resolve to continue holding through some volatile times. This is easier to do in a high-ranked stock with strong fundamentals, which can eventually build out a new base and then move onward and upward. 

Note that in the case of HLEX, investors who bought at the earlier breakout on June 23rd had a low enough cost basis to not get hurt (other than seeing their profits quickly taken away).  However, those who may have first bought into the stock at a later stage (or averaged up) may have been forced to sell, per the 7-8% rule, their shares purchased at higher prices.

 It fell back in $19-22 trading range of the 16 weeks prior to its breakout gains of October 14th, but it has avoided falling and closing back into the earlier base (before its June 23rd breakout). Obviously there are some reasons to have concern about this selection's near term outlook, but encouraging signs are stock’s quick bounce after the test of its 200-day moving average (DMA) line, and then prompt rally to a support zone near its 50 DMA. 


About Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net :
Kenneth J. Gruneisen has successfully completed the CAN SLIM® Certification Program.  Mr. Gruneisen became a Registered Representative in 1987 and his career includes experience offering personalized assistance to investors with more than a decade of experience as a Registered Principal managing a branch office.

The recommendations made by CAN SLIM® certified individuals are their own and may not be attributed to the CAN SLIM® Certification Program, William O'Neil & Co., Investor's Business Daily or their affiliates. The CAN SLIM® Certification indicates only that the individual has successfully completed the CAN SLIM® Certification Program. CAN SLIM®, William O'Neil & Co., Investor's Business Daily and any of their affiliates are in no way responsible for any loss or damage caused as a result of the services provided by these individuals.


Comments contained in the body of this report are technical opinions only and are not necessarily those of Gruneisen Growth Corp. The material herein has been obtained from sources believed to be reliable and accurate, however, its accuracy and completeness cannot be guaranteed. Our firm, employees, and customers may effect transactions, including transactions contrary to any recommendation herein, or have positions in the securities mentioned herein or options with respect thereto. Any recommendation contained in this report may not be suitable for all investors and it is not to be deemed an offer or solicitation on our part with respect to the purchase or sale of any securities.

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The recommendations made by CAN SLIM® Certified individuals are their own and may not be attributed to the CAN SLIM® Certification Program, William O'Neil + Co., Investor's Business Daily or their affiliates. The CAN SLIM® Certification indicates only that the individual has successfully completed the CAN SLIM® Certification Program. CAN SLIM®, William O'Neil + Co., Investor's Business Daily and any of their affiliates are in no way responsible for any loss or damage caused as a result of the services provided by these individuals.

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