Page 236 - How to Make Money in Stocks Trilogy

118 A WINNING SYSTEM

The winning individual investor waits to buy at these precise pivot points.
This is where the real move generally starts and all the exciting action
begins. If you try to buy before this point, you may be premature. In many
cases the stock will never get to its breakout point, but rather will stall or
actually decrease in price. You want a stock to prove its strength to you
before you invest in it. Also, if you buy at more than 5% to 10% past the pre-
cise buy point, you are buying late and will more than likely get caught in
the next price correction. Your automatic 8% loss-cutting rule (see Chapter
10, “When You Must Sell and Cut Every Loss . . . Without Exception”) will
then force you to sell because the stock was extended in price and didn’t
have enough room to go through a perfectly normal sharp but minor cor-
rection. So don’t get into the bad habit of chasing stocks up too high.
Pivot buy points in correct chart base patterns are not typically based on a
stock’s old high price. Most of them occur at 5% to 10% below the prior peak.
The peak price in the handle area is what determines most buy points, and
this is almost always somewhat below the base’s actual high. This is very
important to remember. If you wait for an actual new high price, you will
often buy too late. Sometimes you can get a slight head start by drawing a
downtrend line from the overall pattern’s absolute peak downward across the
peak where the stock begins building the handle. Then begin your purchase
when the trend line is broken on the upside a few weeks later. However, you
have to be right in your chart and stock analysis to get away with this.

Look for Volume Dry-Ups Near the Lows of a Price Pattern

Nearly all proper bases will show a dramatic drying up of volume for one or
two weeks along the very low of the base pattern and in the low area or few
last weeks of the handle. This means that all of the selling has been
exhausted and there is very little stock coming into the marketplace.
Healthy stocks that are under accumulation almost always show this symp-
tom. The combination of tightness in prices (daily or weekly price closes
being very near each other) and dried-up volume at key points is generally
quite constructive.

Big Volume Clues Are Valuable
Another clue that is valuable to the trained chart specialist is the occurrence
of big daily and weekly volume spikes. Microsoft is an example of an out-
standing stock that flashed heavy accumulation just before a huge run-up.
Weeks of advancing prices on heavy volume, followed in other weeks by
extreme volume dry-ups, are also a very constructive sign. If you use a Daily