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INM Aug '07 - Breakaway Gap Fighting Against A Negative Market
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
The "M" criteria argues that this is not the smartest time in the market to be making new buys, since the market averages' steep correction last week raised a caution flag for investors. Market conditions are one very major concern now - as down markets hurt our odds because 3 out of 4 stocks follow the general market direction. Even in a good market you cannot always be right, and when you are not sure it is best to be safe. This is why taking losses at the 7-8% level is the #1 sell rule and should continue to be our guideline.
But a big "breakaway gap" up is again signaling a technical buy in Under Armour (UA), a stock I have sold for losses on more than one occasion this year. If I took it personally, right now I would feel dumb. We have recently taken some relatively small losses in certain stocks like UA, but I am not angry or too upset over it. In the context of war, "friendly fire" can tragically kill a great guy like Pat Tillman. Thankfully, with stocks, we are not talking about matters involving life and death, we are only talking about how to smartly manage financial losses and be as successful as possible over the long haul.
It is a consequence of having a sell discipline that sometimes the stocks we rightly sell to protect our interest will come back. Sometimes I have seen this happen again and again with the same stocks, which can really get frustrating! Cost of the trades is never a considerable factor in the bottom line performance as much as the % change in the price of the stocks while you own them. We MUST avoid large losses, and taking a small loss is the only sure way to prevent it from becoming a bigger loss.
All of the biggest winners I have ever seen exploded to new highs with heavy volume, including stocks in the past which initially shook us out like Qualcomm (QCOM). That is one that you probably remember rose about 20-fold back when it was hot.
I closely studied a handful of this 2007's stocks staging "breakaway gaps" and noticed the following:
Crocs, Inc. (CROX) - May gap - traded in close range for 1 week, then +80% in 3 months
It should not be overlooked that those examples came during a favorable market environment, but we cannot say that the market is favorable now! However, the broader market had at least 5 ugly corrections between 2004 and now, yet Hansen Natural Corp (HANS) was one of the rare outliers than fought well through those difficult market periods, and it made a 45 fold run - the biggest winner in CANSLIM.net history! So, some may obviously consider it "aggressive" to be a buyer in the present market scenario, but if a case can be made for buying anything, I believe a case could be made for buying back Under Armour (UA) once again. We should also be ready again to limit the damage if we just don't get what we expect to get from the stock.
Since the above examples often lingered for a while after their breakaway gaps, I am expecting that there is a fair chance that for several days UA might trade in the $61 range where it ended Tuesday's session, but nobody knows for sure. Please feel free to call me as you consider it, or to let me know your thoughts.
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.
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