What Do You Do With A Stock That Breaks Out
Above The Top of Its Channel and Goes Hyperbolic?
When the stock reaches the upper channel, the odds favor that it
will fall back. This is evem more true if shows the 4 classic signs
of a "Climax Reversal Day". This occurs (1) after a long advance.
The stocks (2) gaps up, shows (3) high Red volume and then (4) closes
closer to daily lows than its highs. The classic technical analysis
book by Edwards and Magee says that traders should post a
protective Sell stop 1/8 (.125) below the previous day's close.
If the next day the stock advances, then move the stop up so that
it is again just 1/8 below that day's close.
Tiger users should understand that a stock showing lots of blue
Accumulation on the screen, such as MDR shows, should probably
only sell 1/2 of the position in this maner. There is always the
possibility (perhaps, 40%) that the stock will break out above
the channel. In that case, the stock may go well hyperbolic.
Its rate of ascent will sharply increase. A minimum upside target
can be calculated by adding the height of the channer to the
point of breakout. In the case of MDR the channel is about 10
points wide. So add 10 to the point of breakout. That gives
a minimum target of 67.5 + 10, or 77.5. However, rather that
sell the second half of a profitable position too quickly, it is
usually better to let the stock run until it violates on a closing basis
its 10 day ma.
There are lots of other considerations:
1) The state of the market. If the bull market is new, let the stock
run...But if it has been advancing a long time, without a correction,
be ready to take profits much more quickly.
2) A stock in a strong industry will carry further. MDR is in the
hot energy service sector.
3) How volatile is the stock. MDR's beta is nearly 4. It is
highly volatile. Traders will generally do best not to let
profits qickly escape.
Some aggressive traders go looking for these upper channel busters.
Always work with proective Sell stops if you do this! The point
where the stock broke out of the channel is apt to good support
for a while. You can place a stop 1% below that point, conservatively
calculated.
