A Couple of Good Trades

Even before the market followed-through on March 20th to begin the most recent rally, my screens began returning a half-dozen or more oil stocks every night. The screens worked well, they spotted the strongest group and I didn't act on it.

As I've mentioned, I listened to all of Bill O'Neil's radio interviews on TFNN. One thing he stressed over and over was that the biggest winners tended to be companies which have IPO'd within the last eight years. Most of the oil companies coming up on my screen were 'stodgy' older companies that had been plodding along for years.

However, like the recent fertilizer boom, I could have recognized that the 'N' in CAN SLIM - the 'New' - was the incredible market forces moving oil prices higher. This was great for the group but another reason I avoided it - I don't understand commodities and try to leave alone stocks that trade off the dollar, inflation, or other similar factors.

I'm not sure I was wrong in this. There are a reasonable number of good opportunities in the market. If I really don't have a 'feel' for a particular sector of the market, I don't see much harm in avoiding it. I've been communicating via email with a reader of my blog who's been very successful using the CAN SLIM system, and he filters out all commodity stocks so they don't even show up in his screens. If he doesn't feel he can understand the business to some extent, he doesn't want to own it. I don't think anyone can argue with this approach - perhaps feeling some level of confidence in a stock is part of the intangibles that go into making one a successful trader.

I'll add that I also thought the oil sector looked extended, and many of the stocks that were breaking out of this group were doing so on poor volume. In a new rally after a large correction, I was looking for new leadership. To see the same old energy group moving up further in low volume looked like a red flag to me.

I did see (CLR) take off and in early April I bought a bit of (SD) as it looked similar. It didn't do much for me and I stopped out even before it took off recently. My experience trying to find the second best stock in a group has not done well recently - I've stopped out on: (PWRD) - the leader is (SOHU); (GU) - the leader is (SOL); and the above-mentioned (SD).

Then on April 16th my Pitbull screen showed a stock that had exploded from a v-shaped cup base on massive volume - (SOL). Technically the cup was flawed - you want to see a rounder cup pattern, not a 'v' shape. However the fundamentals were tremendous as was the volume pouring into the stock on it's move up. It had IPO'd just six months ago, and the growth estimates were good. It was trading around $15 and I calculated a two year price target of $84. As far as the base was concerned, I'd read a number of times in IBD that IPO's don't always form perfect bases. I decided to buy it.

I had missed this stock's breakout and bought a bit higher than the rules call for. The buy point was $14.29 and I bought at $15.25 - almost 7% above the buy point (the limit is 5%). I liked how the stock was acting post-breakout so I took a chance. (SOL) increased over 30% in the next three days, which qualified it as a potential 'big winner' according to 'How to Make Money in Stocks.' This means I should try to hold the stock for at least eight weeks from the breakout.

I had never had a stock act this well. It went on to advance as high as $29 - 92% above my buy point. As I've discussed in prior posts the book is not written on this trade yet - but even if I botch it now I still have the experience of finding this kind of big winner stock. That should benefit me greatly in future trades.

By the time I purchased (SOHU) in late April I had already started this blog and I wrote about it then, so I won't rehash the specifics of that trade now. Suffice it to say that for the first time I owned two winning stocks. I wiffed on (PWRD) and (GU), then decided I didn't want to risk any more losses eating into the gains of my winners. I had learned my lesson on that last year. If I hadn't made another trade after buying (RIMM), I could have finished the year up 10%, instead of down 20%.

I guess that completes my synopsis of what brought me to this point - if you're looking for a sleep aid you'll have to go elsewhere now! This has been a very valuable exercise for me, and at the risk of sounding like I'm bragging it's helped me see the progress I've made over the past year. This is not to say that I'm doing great now, but rather that I think I'm reasonably less moronic.

In the future I'll spend my time here devoted to my thoughts on the market, my portfolio, failed trades (I still need to review (PWRD) and (GU) in depth), and whatever else comes to mind related to trading stocks.

-Geoff