There have been a number of members who have recently remarked about the severity of the breakdowns occurring in the market, including considerable pullbacks in many of the recently featured stocks appearing in CANSLIM.net reports. While acknowledging that there are a number of high-ranked leaders which have been clobbered during the broader market's latest plunge, to properly put a few of the worst examples we might look at in context, we should also consider the action which has led to implosions for a few well known companies. Below we will study a couple of well-known components of the Dow Jones Industrial Average, and then we will have a closer look at some of CANSLIM.net's recently featured favorites.
Stocks That Were Not Featured in CANSLIM.net Reports
Citigroup Inc. (C) actually topped in the last week of 2006. It was never featured as an ideal buy candidate in CANSLIM.net reports because of its numerous shortcomings, most notably its lack of earnings growth. Disciplined investors who follow the investment system's rules would not have been looking at it because of its lack of sufficient earnings growth. Not one of its past 8 quarterly comparisons showed a +25% earnings increase over the year earlier. Telltale signs the stock was technically deteriorating showed up throughout 2007, and they are rather easy for even an amateur technical analysts to spot. First, in late-February and early-March it encountered heavy selling pressure that negated its early-December 2006 breakout as it fell back into a prior base. Then, in July, it sank under its March 14th low ($48.05), violating another of its earlier support levels. In mid-October the volume totals spiked way above average again as it again failed under prior lows, slicing below the $44 range, with heavy volume behind the damaging losses. That gave investors clear proof that institutional sellers were in a mad rush for the exits. Citigroup went on to fall more than -50% from October 11, 2007 to January 22, 2008.
Intel Corp (INTC) got off to a sluggish start in 2007. In 2006, its quarterly reports repeatedly showed lower sales revenues and earnings than in the year earlier period. As its quarterly results started showing some improvements, the stock climbed toward prior chart highs in the $28 area (best viewed on a weekly chart). The company's up and down annual earnings history failed to satisfy the A criteria. A closer look at its chart shows very light volume behind its gains in December. From the very beginning of 2008 it was hit with heavy distribution. At their January 22nd, 2008 low, Intel's shares had fallen more than -35% since December 6, 2007.
Stocks Featured in CANSLIM.net Reports
Garmin Ltd (GRMN) spent the first few months of 2007 basing, but it heated up in May. It met the screen criteria to appear in the 5/23/07 CANSLIM.net Mid-Day Breakouts Report, then a more detailed write-up was provided along with an annotated graphs in that evening's CANSLIM.net After Market Update under the headline "New Pivot Point for an Old Favorite" (read here). In that report we observed - "Its April 30th, 2007 high can now be used to arrive at a new $59.80 pivot point and $62.79 ‘max buy' price 5% above the pivot." The stock went on to rally +104%, more than doubling in the following 4 months.
But things changed for the worse in early October, after GRMN had been repeatedly noted as "extended beyond its max buy price". It was noted on 10/1/2007 after it "Gapped down for a considerable loss on heavy volume, but bounced from session lows near chart support", and we observed that "Chart support is at its prior highs near $105, and its 50 DMA line." It was noted again on 10/2/2007 after a "Considerable loss on heavy volume, closing just under its 50 DMA line ($100.80) on a second consecutive day of heavy distribution. A detailed analysis and an annotated graph were provided in the 10/03/07 CANSLIM.net After-Market Update as the headline announced "Gap Down Followed By More Damaging Losses Including 50 DMA Breach". That write-up included a clear explanation - "The high volume losses in GRMN have triggered multiple sell signals as it violated its 50 DMA line and upward trendline." (read here). In this case, 7 of the company's past 8 quarterly comparisons showed much greater than +25% earnings increases over the year earlier." But despite its strong underlying fundamentals, investors who ignored the numerous technical sell signals it flashed in the past few months may have been surprised to see the stock surrender all of its gains since the May '07 breakout. Garmin's shares had fallen -56% from their 10/24/07 high as of their January 22nd, 2008 low. This offers an important lesson, that regardless of all other factors, investors must be ready to make a hasty exit whenever serious technical sell signals show up.
Google Inc (GOOG) was featured in yellow at $560.33 in the 9/21/07 CANSLIM.net Mid-Day Breakouts Report as it was technically breaking into new high ground (read here). It went on extended winning streak, rallying up as much as $187, trading +33% higher in less than 2 months. Toward the latter stages of its steep upward sprint it was repeatedly noted in CANSLIM.net reports that, "A steep upward trendline connecting recent chart lows is an initial chart support level for investors to watch, as a breach could be a sign of more serious deterioration." Along with hints that were pointing out a technical signal for investors to watch out for (to know when to lock in some profits), there were also ongoing reminders to avoid buying stocks extended above the maximum buy point, because doing so is considered "chasing" and typically hinders performance. The action in GOOG has also exemplified how higher priced stocks have the ability to produce great gains, despite the common belief that considerable gains are more easily found in low priced stocks. The market commentary in the November 2007 issue of CANSLIM.net News summarized the overall market action, wherein it was also established that the market was mostly favoring big cap stocks. (read here).
GOOG hit its peak on 11/07/07 at $747.24 and a detailed summary and annotated graph were included in that evening's CANSLIM.net After Market Update (read here). What immediately followed was an abrupt pullback to its 50 DMA line where it found support and rebounded. However, weeks later its rally fell short of its prior highs, and it fell back toward its 50 DMA line again. On 1/04/08 the stock violated an upward trendline connecting prior chart lows, and in that evening's CANSLIM.net After-Market Update (read here) the breach was noted along with an annotated graph while it – "Triggered a technical sell signal by violating its 50 DMA line decisively with a considerable loss without extremely heavy volume." Added was a forward looking thought that, "One can only imagine the effect heavier volume selling might have, but a retest of old chart highs in the $560 area may not be out of the question. Its chart pattern had been previously noted for its bearish series of lower highs, along with the fact that its latest gains lacked volume indicative of serious institutional buying demand." A couple of weeks later, GOOG closed at $615.96 when it was dropped from the CANSLIM.net Featured Stocks list on 1/16/08 based on the considerable weakness that had pressured it under its November chart lows. Within the next 4 trading days it had traded as low as $519.00, demonstrating what can happen whenever a prior support level is violated. In this case, all 8 of the company's past 8 quarterly comparisons showed much greater than +25% earnings increases over the year earlier. Despite its strong underlying fundamentals, investors who ignored the numerous technical sell signals it flashed in the past few months may have been surprised to see the stock surrender its prior gains.
Interactive Intelligence, Inc. (ININ) is a lesser known company that was featured at $26.08 in the December 2007 issue of CANSLIM.net News. However, afterward it only made progress for a couple of days, rising to $30.16 before its negative reversal on 12/05/07 which was noted in that evening's CANSLIM.net After-Market Update (read here). It pullback and bounced at its 50 DMA line, then rallied again with unimpressive volume. It was noted as follows on 1/02/08 - "Recently found prompt support near its 50 DMA line but encountered resistance when recently trying to claim new high ground. Volume was not great behind its early 12/05/07 gains, then volume increased as it sold off. On 12/04/07 it traded above its prior chart highs with volume more than double its average daily trading total, but it closed the session below its pivot point. Just featured in the December 2007 issue of CANSLIM.net News (read here). As previously noted, ''Look for ININ to trigger a new technical buy signal by breaking out from its base-on-base type chart pattern and climbing past the pivot point of $28.64 in the coming days and weeks. Remember that buyable breakouts must clear their pivot point with gains backed by at least +50% above average volume.'' Deterioration under its 50 DMA line and prior chart highs in the $23 area would raise concerns and trigger technical sell signals.
From the very beginning of 2008, the were many more worrisome technical breakdowns, and with respect to ININ we noted on 1/04/08 as it - "Gapped down for a considerable loss today on three times average volume, slicing under its 50 DMA line and falling under prior chart highs in the $23 area triggering technical sell signals." Then on 1/07/08 it was noted - "Considerable loss with heavier volume, violating its 200 DMA line", as it closed at $19.01 and it was also noted that the stock was being dropped from the CANSLIM.net Featured Stocks list. Investors who may have rationalized that it was worth holding onto for any reason were dead wrong. From its 1/07/08 close it fell to $11.00, down another -42% in just 10 trading days, down an astounding -63.5% from its 12/05/07 high at last weeks low. This is another fine example that serves as a reminder for investors to limit losses whenever a stock falls more than 7-8% from their buy point. It is the single most important action investors can take to prevent even larger losses.
Losses are virtually inevitable if you are going to invest in stocks, and investors must always keep their losses small. Of course, investors who understand the important impact that earnings growth normally has on stock prices (hopefully most CANSLIM.net members) know that it is usually best to avoid companies showing lackluster growth or inconsistent earnings increases. Again, that is the reason why companies like Citigroup Inc. and Intel Corp. were not Featured Stocks. CANSLIM.net reports, instead, called attention to companies that were demonstrating superior earnings growth like Garmin Ltd and Google Inc. However, in a downward trending market most stocks fall, and even fast growing companies are vulnerable to considerable losses. The ongoing coverage provided in CANSLIM.net reports helps to alert members to important buy signals and sell signals that occur in the high-ranked leaders after they are featured, making it easier for members to know what actions to take.
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