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INM Nov '06 - Earnings Related Volume and Volatility Shouldn't Make You Stain Your Underwear
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
CANSLIM.net


Longtime readers have heard me repeatedly say that we should trade based upon what we actually see happening, not based upon what we think might happen. But, once again, we are seeing many issues encountering a period of wild volatility and heavy volume surges which are typical near earnings reports. And still I find myself amazed that experienced investors I talk to get jumpy when earnings news hits and trading volume spikes way up.
 
It seems too difficult for some people to do nothing but just sit there while a stock suddenly trades 8 times its average volume.  That is what Under Armour Inc (UARM) did today after announcing stellar sales revenues and earnings increases for the quarter ended September 30, 2006.  It earned 32 cents per share versus 18 cents per share in the year ago quarter, for a great big +78% increase.  That blows away the +25% minimum guideline we follow under the CAN SLIM(R) investment program!  It was a volatile session that began with a 75 cent gap down in price, something that we normally might consider as a sell signal.  However, within minutes it erased the initial loss and rallied up $4 from its opening tick to reach a new all-time high.  Of course, that burst of buying was a beautiful sight - fantastic news for anyone that owns it!   But then came a nasty reversal, and amazingly, it gave back the huge intra-day gain it had. By noon it had plunged to new lows for the session.  How horrible!  Yet later in the afternoon it fought back into positive ground once again.  It ultimately ended the day down -0.83%, hardly a change that could be considered worrisome.
 
You might wonder why this high-ranked selection was not prominently featured in yellow in one of the CANSLIM.net reports.  The best answer I can give you is that we prefer stocks showing earnings increases of at least +25% in the three latest quarterly comparisons.  UARM showed increases over the year ago period of +15% in Dec '05, +260% in Mar '06, and +25% in June '06.  So, the +15% increase was considered a shortcoming, even though it was the oldest of the three latest reports, and even though there was the one massive increase in the triple digits. The good news is that now we can say that the three most recent comparisons meet that +25% minimum guideline.  The bad news is that the stock is a little more than 5% above its old chart highs ($43.50 on June 30 and July 25) and not at an extremely ideal buy point now.
 
There are concerns whenever we see a negative reversal day, where a stock starts out blasting to new all-time highs, then reverses and closes with a loss on heavy volume.  That action would be more worrisome if the stock was greatly extended in price (i.e. trading +70-100% or more above its 200-day moving average line).  However, in this case, UARM is about +27% above its 200 DMA.  A negative reversal would also prompt great concern if the stock had negated a recent breakout and was falling back under old chart highs and closing back into its prior base.  In this case, the stock has never even re-tested support at the old chart highs - which typically happens in about 40% of the successful breakouts that do go on to produce great gains. 
 
UARM has undoubtedly encountered some pressure from profit takers who bought on anticipation of the earnings and are now selling into the earnings news.  Maybe it might spend more days, or even weeks, consolidating after rising +49% from its September 7th low to its October 16th peak.  That was quite a run without a serious price pullback!  Could that impressive sprint be the end of a great run?  Yes, it could.  But this reversal was hardly what we would consider to be a "climax run".  I believe the strength it has shown in recent weeks is more likely a sign of more great things to come.  And if I am wrong, I know when to admit defeat and exit the trade.
 
If the broader market encounters some weakness near-term, it may actually be helpful to those who might be inclined to buy on light volume dips toward chart support. Healthy stocks tend to quietly retrace after big gains.  However, if the market stays strong, it could be a while before UARM encounters support at its 50 DMA line, a level which I may consider as a good add-on point depending on how it gets there.
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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