A Handful of Stocks Ready to Move
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
In the stock market there is a lot of bad information. This information comes at you in all forms of different media. Do you listen to this information or ignore it? This is what separates the best traders from everyone else. The best traders have learned to ignore everything except the truth. The only truth is price.
Price is the only fact that matters to a trader. I am a firm believer that it doesn't matter what methodology you use in the stock market. As long as you diligently cut your losses quickly, you can make money employing a variety of investing methodologies.
The methodology I want to highlight today is the methodology I use to do the bulk of my trading. The CANSLIM methodology. This methodology is my main source of creating income during markets that are in an uptrend. 130 years of historical stock market research shows that the greatest winning stocks combine seven similar traits before they start their biggest runs.
Fundamentals plays a huge roll in selecting the stocks I want to invest 5% to possibly 20% of my total account value in. However, fundamentals alone are useless if you are looking at beating the market year in and year out. To beat the market constantly, you have to learn to use Technical Analysis. No matter how great the fundamentals of a company are, if you are in a vicious bear market, your investment will lose money -- 4 out of 5 stocks follow the general trend of the market.
When the market is trending down, you want to be short. When the market is trending up, you want to be long. When the market is choppy you want to be heavy cash. Bottom line. Right now the market is in an uptrend. On Jan. 5, Big Wave Trading's Market Direction Model switched to a full BUY signal from a partial BUY signal generated on Jan. 3.
Since this signal switch I have aggressively gotten my portfolios fully invested in many top-notch stocks breaking out of tight consolidation patterns on very strong volume. Some of the best performing current holdings include Faro Technologies (Nasdaq: FARO), Direxion China Bull 3x (NYSE ARCA: YINN), Renren (NYSE: RENN), and Westport Innovations (Nasdaq: WPRT).
Today, I want to look at a handful of stocks that are creating solid base patterns that should lead to higher prices. That is, if the market continues to be in an uptrend. If the market comes under a rash of distribution days over the next few weeks, you can be sure these stocks will feel the selling pressure. This is why, no matter what, when you enter a stock you should know exactly where you should exit.
You should never buy a stock and not know where you are willing to cut your loss if you are wrong. The greatest traders do not hold losers. They cut their losses fast knowing that if they have a strong methodology they can only be right 10% to 20% of the time and still make a ton of money by keeping their 80%-90% losses to 2% or less. My own personal trading (as can be seen on my website under Announcements) is around 60% correct to 40% incorrect with winners beating losers by at least 3-to-1. This allows me to make significant gains during trending markets while protecting myself during market periods where nothing seems to go right.
Today, let's take a look at H&E Equipment Services (NASDAQ: HEES), Colfax (NYSE: CFX), Solarwinds (NYSE: SWI), Lithia Motors (NYSE: LAD), and Tangoe (NASDAQ: TNGO).
H&E Equipment Services is just finishing up creating the right side of a deep cup base. If HEES can now move sideways from here for at least five days I would consider taking the next breakout on strong volume. Another possible entry is with a bounce or move off of its 10 day moving average. If the volume on that move is higher than any volume on a down day during the past ten sessions then I would consider taking a position. The first buyable breakout was on Jan. 10. I missed this trade due to it not appearing in my personal CANSLIM watch list due to the stock being too far away from its previous 52-week highs and because it trades under 500,000 shares a day thus missing my "BOP" scan.
Colfax is bouncing off the 50 day moving average on very strong volume which follows the bullish intraday reversal off the 50 day moving average two sessions ago. This is a great place to enter the stock here using the LOD or the 50 day moving average as your absolute final cut loss area. I thought about adding to my current position, which was taken on Jan. 4, 5, and 6, but decided to pass after finding multiple new longs to purchase following Friday's stock market session.
Solarwinds is currently shaping out a strong base-on-base pattern (first base: July-October. second base: December to current). Solarwinds has traded very tight during this past month of basing action with a very strong retake of its 50 day moving average. If Solarwinds can breakout here on strong volume it would definitely be a stock I would want to get long as long as the market continues in its current uptrend.
Lithia Motors, like Solarwinds, is creating a solid base-on-base pattern (first base: July-November. second base: December to current). LAD's trading has recently turned very tight and it appears coiled for a breakout to new highs. If this occurs you can be sure LAD will become a new long in my portfolios.
Tangoe is a new issue with some explosive growth in EPS and sales. This is showing up in the strong price action of the stock since coming public. Tangoe is now basing sideways and trading is getting tighter and tighter. This indicates it is coiled for a breakout. This breakout should be to the upside but nothing is guaranteed in the stock market. If TNGO breaks out to new highs, I will definitely be going long this new issue powerhouse.
Today's analysis was brief but to the point. That is how it should be in the stock market. In the future I will detail the possible trades out in more detail. For my first post on Fool.com, I found it necessary to give everyone a handful of high-quality potential longs.
The most important thing about all these possible long positions is that if they breakout and then reverse lower or go nowhere, I will sell them. I have no time to waste in positions that do not make me money immediately. Time is money. If these breakout and do not move, yet the market is still in an uptrend, there will be other stocks that will breakout and produce big gains. I want my money out of the laggards and put into the winners.
The three most important rules in trading break down like this. 1. Always cut your losses fast. No questions asked. 2. I am serious! Always cut your losses fast. No questions asked. 3. When you do have a winner trending higher or lower let it run.
Motley Fool newsletter services recommend Westport Innovations. The Motley Fool has no positions in the stocks mentioned above. BigWaveTrading has long positions in WPRT, YINN, RENN, FARO, CFX. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
