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Special Report Series (Part 1) - Dow Jones Industrial Average Follow Through
Kenneth J. Gruneisen, Founder and Contributing Writer, www.CANSLIM.net
The major averages surged on Thursday, as the Dow Jones Industrial Average scored a follow-through day which confirmed the market's latest rally attempt. One obvious thing to be watching for is more improvement in the major indices, such as follow-through days for the tech-heavy Nasdaq Composite Index and the benchmark S&P 500 Index - which just ended its most volatile week in 70 years, according to an S&P study of daily price swings in the S&P 500. The index has advanced or declined 1% or more on 28 days this year, which is more than half the trading sessions in 2008 and the highest ratio since 1938.
The table below shows how far the major averages are trading below their 50-day & 200-day moving average (DMA) lines, with the Dow Jones Industrials being the lone exception based on its finish above the 50 DMA line to end the past week. The tech-heavy Nasdaq Compsite clearly has the most work to do, still almost -12% below its 200 DMA line. The case for a new Bull Market becomes much more compelling if we see improvements above these key technical marks for the major indices:
Hopefully, we shall see the indices work on establishing a series of higher lows as they climb back above their respective 50-day moving average and 200-day moving average lines. It would also be encouraging to see improvement, technically, above the levels where each of the major averages' charts show noticeable bottoms that occurred in August 2007. Note that on August 26, 2007 CANSLIM.net published its Special Report titled "7 Stocks That Should Now Be On Your Watch List" (read here). One of those buy candidates, Sun Power Corp (SPWR) subsequently rose +158.92% in the next few months, demonstrating the explosive potential high-ranked leaders meeting the investment criteria can have. It doesn't take many winners like that get your portfolio out performing the major averages. Of course, it also bears mentioning that other ideas included in that very same report demonstrated the importance of a having a sound sell discipline too, even SPWR, which negatively reversed on 11/08/07 to cap a climax run. It is now -62.9% off its high! Ongoing notes on featured stocks in CANSLIM.net reports help investors stay aware of the day-to-day action and recognize sell signals as they occur.
Your odds of success are much greater when you choose a leading stock in a leading group of stocks, as O’Neil’s research shows that “most of the top-performing stocks are found in the top quartile of groups, and that group action determines at least half of a stock’s performance”. That is a direct quote from the description accompanying the 197 Industry Group Rankings. So, one point that the most observant readers will notice is the fact that leadership is still rather elusive at the present stage of this new confirmed rally, and several of the buy candidates outlined below are specifically noted for their shortcomings in respect to the L criteria. A better environment is expected to yield better examples from leading groups ranked higher on the list.
The following list is a sampling of stocks that presently have many if not all of the right characteristics of stocks that CANSLIM.net members might want to have on their active watchlist now. You should still conduct the analysis necessary to make an informed buy and/or sell decision, and watch for the classic buy signals such as a break out on big volume above the pivot point cited for each stock. Things change on a minute-by-minute basis when it comes to individual stocks, and the best way to avoid large losses is to always sell a stock if it drops 7-8% below your purchase price. All bets are off if any of the major indices nosedive through their recent lows! As always, don't fight the tape!
**** Timely Stocks Worth Having On Your Watch List ****
CANSLIM.net Profile: MICROS Systems, Inc. designs, manufactures, markets, and services enterprise information solutions for the hospitality and specialty retail industries. Its enterprise solutions comprise hotel information systems, restaurant information systems, and specialty retail information systems. The company also provides system installation, operator and manager training, on-site hardware maintenance, customized software development, application software support, credit card software support, systems configuration, network support, and professional consulting services, as well as software-hosting capabilities. In addition, it sells spare parts, printer ribbons, paper, printer cartridges, other consumable media supplies, network products, and printers through direct sales offices, dealers, and distributors, as well as telephone and POS depot. MICROS Systems operates in the United States, Europe, the Pacific Rim, and Latin America. The company was founded in 1977. It was formerly known as Picos Manufacturing, Inc. and changed its name to MICROS Systems, Inc. in 1978. MICROS Systems is headquartered in Columbia, Maryland. MCRS sports a strong Earnings Per Share (EPS) rating of a 96 and a very healthy Relative Strength (RS) rating of 94. The company has managed to increase its earnings by above the +25% guideline in the past few quarterly comparisons versus the year earlier helping satisfy the C criteria. Steady years of strong earnings increases satisfy the A criteria. The number of high ranked funds have increased from 164 in March '07 to 173 in December '07 which helps satisfy the I criteria. Return on equity is 19%, above the 17% guideline. However, MCRS resides in the Computer - Integrated Systems group which is currently ranked 94th out of the 197 Industry Groups covered in the paper, placing it outside the much preferred top quartile. Strength in other similar stocks in the group would be a help for it to satisfy the L criteria and overcome this shortfall.
What to Look For and What to Look Out For: Look for MCRS to trigger a technical buy signal, which could come if it rallies and closes above its pivot point with gains backed by at least 1.56 million shares. Volume needs to be at least +50% above average behind considerable gains to trigger a proper technical buy signal - the high volume behind a breakout's gains is a critical sign of institutional buying demand (the I criteria) . It would be very encouraging to see MCRS trigger a technical buy signal and continue rallying to fresh highs on heavy volume in the days and weeks to come. However, if volume fails to meet the minimum guidelines and the stock does not trade above its pivot point then a proper technical buy signal would not be triggered. Its 50-day moving average (DMA) line is the next nearby support level of importance chart-wise, and violations would lead to further downside testing. Avoid chasing this issue above its maximum buy price of $38.11, where it would be too extended from a sound price base. As always, it is of the utmost importance to sell a stock if it drops 7-8% below your purchase price.
Technical Analysis: Since its big gap up gain on 10/26/07 with heavy volume, Micros began building its latest base. During the 5-months it consolidated a very healthy advance, and the stock exerpienced a sharp sell in January when the broader market tanked. It sank under its 200-day moving average (DMA) line, but it stayed well above its June 2007 lows and soon recovered above its important longer-term average with gains backed by very heavy volume. Its 2/01/08 gap up gain was a sign of heavy institutional buying demand (the I criteria) during its base building process. MCRS has recovered nicely and is currently perched -4.5% below its all-time highs. This is best illustrated by the stock's 94 Relative Strength rating and the fact that its relative strength line is leading the way into new high territory.
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What to Look For and What to Look Out For: Look for the stock to confirm a new technical buy signal by breaking out and closing above its $222.35 pivot point with gains on heavy volume in the coming days and weeks. It has rallied near that threshold, but remember that buyable breakouts require three important components: the stock must clear its pivot point with considerable gains, those gains must be backed by at least +50% above average volume, and the overall market environment must improve and produce a new batch of leadership. On Thursday, March 20, 2008 the market confirmed its latest rally attempt which helps means the environment conducive for accumulating shares again. As always, it is of the utmost importance to sell a stock if it drops 7-8% below your purchase price. This high-ranked leader should remain on an active watchlist and could be considered as a new buy candidate in the event it closes above its pivot point on the necessary volume needed to trigger a technical buy signal. Any failure and damaging losses leading to a close back under its 50-day moving average (DMA) line would raise concerns and trigger technical sell signals.
Technical Analysis: MA technically enjoyed its second best close ever and remains perched just below its pivot point. Chart readers may note that during the market's steep January correction MA pulled back and found support near last year's highs in the $174 area, and stayed well above its longer-term 200 DMA line. The stock has spent the past four months building its latest base, and now there is little resistance remaining from overhead supply. Healthy action is also demonstrated by the gains on its three most recent weeks that were marked by above average volume. The stock is currently trading just -3.0% shy of its all-time high and has enjoyed healthy gains since its IPO in May 2006.
CANSLIM.net Company Profile: Kirby Corporation, through its subsidiaries, provides marine transportation and diesel engine services in the United States. It offers marine transportation services, including inland transportation of petrochemicals, black oil products, refined petroleum products, and agricultural chemicals by tank barges; and offshore transportation of dry-bulk cargoes by barge to petrochemical and refining companies. The company was founded in 1969. Kirby Corporation was formerly known as Kirby Exploration Company, Inc. and changed its name to Kirby Corporation in 1990. The company is based in Houston, Texas. The stock's Composite Rating, which is a combination of all the other readings, stands at a very healthy 97. Meanwhile, the Relative Strength (RS) rating is an impressive 97 and its relative strength line has surged into new high territory. The company's Earnings Per Share (EPS) rating is 94. The company has managed to increase its earnings at a very healthy clip over the past four quarters while sales revenues growth is slightly below the guidelines. The company's annual history has steadily increased for the past few years (good A criteria) which is a healthy sign. Insiders own about 9% of its shares, which provides decent motivation to protect and build shareholder value. Return on Equity of 18% is above the 17% guideline. From March '07 to Dec '07 the number of top-rated funds rose from 110 to 121, helping satisfy the I criteria.
What to Look For and What to Look Out For: Look for KEX to pullback on lighter volume and trade below its maximum buy price before initiating any new positions. After an orderly pullback, one would like to see this stock make further progress above its prior highs on heavy volume. It is important that investors adhere to the proper buy guidelines, accumulating shares after a technical buy signal occurs, but before the stock rises above max buy level, which is considered "chasing" and greatly hinders investors' results. KEX resides in the Transportation- Ship group which is currently ranked 143rd of out the 197 Industry Groups covered in the paper, which is outside the top quartile of groups. Other stocks that reside in the group are not confirming its strong action, so improvement and more leadership in shipping stocks might ease concerns with respect to the L criteria's questionability. Lower energy prices could provide a boost to it and other transportation stocks. Weakness leading to a close back under its $50.26 pivot point would prompt concern. If the stock rolls over and closes below that level then the technical breakout will be negated and odds would then favor it spending more time trading in its recent base. Always limit losses per the 7-8% sell rule, and never hold a stock if it falls more than that much from your purchase price.
Technical Analysis: The stock vaulted out of a six month base and triggered a technical buy signal when it surged above its $50.26 pivot point on over three times its normal turnover. It was featured in the 3/18/08 CANSLIM.net Mid-Day BreakOuts Report after a gap up and considerable gain on very heavy volume to a new all-time high after its latest strong earnings report and raised guidance (read here.) Considerable gains on above average volume have lifted it above its max buy level. Support is at prior chart highs in the $50 area, and patience may allow disciplined investors to accumulate shares on light volume pullbacks. It was very encouraging to see KEX close in the upper half of its range and enjoy its best close ever! Volume is a critical component of institutional sponsorship (the I criteria), and the fact that volume swelled as this stock surged into new high territory showed a strong vote of confidence from the institutional crowd.
CANSLIM.net Profile: LKQ Corporation, together with its subsidiaries, provides replacement systems, components, and parts to repair light vehicles, primarily cars and light trucks, in the United States. It provides recycled original equipment manufacturer (OEM) products and related services, as well as aftermarket collision replacement products and refurbished bumper covers and wheels. It serves collision and mechanical repair shops and insurance companies, including extended warranty companies, through its sales staff. The company was founded in 1998 and is headquartered in Chicago, Illinois. There were 98 top-rated funds with an ownership interest in March '07, yet that number jumped to 186 as of December 07, offering a very strong sign of increasing institutional interest (I criteria). Also, the stock has 106 million shares in the float, which means that the stock does not need a lot of buying to send it higher, unlike stocks with billions of shares in their float. Its annual earnings growth history has been steadily growing, and quarterly earnings increases in recent quarterly earnings comparisons have accelerated nicely. Management has a +21% ownership interest which helps keep their interests keenly aligned with their shareholders. For additional reference, note that the company received a thorough write-up in the 3/20/08 newspaper as well (see here).
What to Look For and What to Look Out For: LKQX hails from the Auto/Truck-Replace Parts group which is presently ranked 185th on the 197 Industry Groups list, which places it outside the much coveted top quartile of industry groups. This raises concerns with respect to the L criteria, and one would like to see the rank improve in the near future and/or see at least one other similar stock showing leadership as a reassurance. Also, disciplined investors would wait to see that the stock first confirms a new technical buy signal by breaking out and closing above its $23.76 pivot point with gains on heavy volume. In the coming days and weeks, remember that buyable breakouts require three important components: the stock must clear its pivot point with considerable gains, those gains must be backed by at least +50% above average volume, and the overall market environment must improve and produce a new batch of leadership. As always, it is of the utmost importance to sell a stock if it drops 7-8% below your purchase price. The relatively small supply of outstanding shares could lead to dramatic price moves, especially if the institutional crowd rushes in or out. This high-ranked leader should remain on an active watchlist and could be considered as a new buy candidate in the event it closes above its pivot point on the necessary volume needed to trigger a technical buy signal.
Technical Analysis: LKQX made some headway above prior chart highs in the $23 area on very heavy volume, and it enjoyed a fresh new all-time high close on Thursday. However, it didn't quite clear the pivot point cited when featured in yellow in the 3/20/08 CANSLIM.net Mid-Day BreakOuts Report (read here). It put up bullish action in a tough market since its 2/27/08 gap up above its 50-day moving average (DMA) line. Gaps up during a stock's basin period are an indication of strong institutional buying demand (reassuring for I criteria). The stock is currently forming the right side of its base, now trading just -1.4% off its all-time high and very near its pivot point on very healthy volume patterns. Its weekly chart is marked by at least 5 up weeks on above average volume without a down week on above average volume occurring since the week ended 11/02/07. In other words, there has been virtually no sign of institutional selling (distribution) which is a healthy sign. Remember that it is imperative to see volume surpass the necessary threshold needed to trigger a technical buy signal as the stock trades and closes above its pivot point. Until then, this high ranked stock should remain on an active watchlist.
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.