New Buy:(STEC), Addon Buy:(GMCR), Mid-Year Review

It looks a bit like I'm trying to trade my way out of a slump. I'm caught a bit between a rock and a hard place. On the one hand, I've over traded, made poor decisions, and lost some money. These factors indicate I should slow down. On the other hand, the rally is working, and leading stocks are acting well and breaking out. This is an excellent opportunity to pick up some stocks that I've been watching for an entry point for weeks. Never bashful, the latter is the approach I adopted. I'm not going to let past failures keep me from buying good stocks at the right time.

My first position in (GMCR) came close to stopping out on Russell Rebalancing day last Friday, but quickly recovered this week. I still haven't seen the volume come in they way I'd like, but the stock seems to be acting well around key support levels. I've been watching it bump up against $60 for about a week, so when it passed through that level I added to my holding. I would like to see the stock make a new high next week when the traders return from vacation.

Additionally, I've been patiently watching (STEC) to see if it would form a high tight flag pattern. It got impatient and broke out today after correcting only a week, and I bought it just above the previous high at $25.33. This stock has as good a technical and fundamental pedigree as anything I've seen. Now it just remains to be seen if that translates into 'monster stock' status.

That's my trading activity today, but I've been giving a great deal of thought to my trading activity this year. I started out quite well, and at this point I'm doing as poorly as the last two years. That is a wakeup call and an indication it's time for me to seriously evaluate what's worked and what hasn't. For the first time I feel I've progressed enough to gain some real value from reviewing the charts of my purchases. In the past that was nearly pointless, because most of the time I was buying crap. This year I've traded fantastic stocks, but more often than not I've timed my buys poorly. It's my goal to further quantify my purchase process in a way that is flexible but successful and repeatable.

At this point, my record on purchases is 2-11-2. With my goal being to hit .500 on my stock picks, I'm a long, long way off. That's fine though - the important thing is to get it right from here, I can't undo history.

Tonight I'll look at my first two purchases, (SNDA) and (TNDM), which I purchased on 3/12 and 3/13 respectively just as the market followed through on this rally.

(SNDA) had broken out from a double bottom pattern prior to the start of the rally on week volume. It reversed the following week all the way back to the 40 wma, where it found support. It rode this line and then the 10 wma right up until the follow through day where it broke out in above average volume, and this is where I bought it. The chart does not show the obvious accumulation that I tend to look for now (think the bars in the ATT wireless adds), but adding up the weeks in the chart the ratio was more toward accumulation than distribution.

(TNDM), on the other hand, did sport obvious accumulation in the chart. The volume soared in the weekly chart as the stock climbed the right side of a well shaped cup base. Like (SNDA), (TNDM) broke out ahead of the follow through day, then consolidated further, and exploded to new highs from the 10 wma on the follow through day.

Both stocks were in strong industry groups at the time of their breakouts, and both proceeded to notch gains of 20% or more before correcting. So why did I sell them for no gain?

Just two days after the follow through day, the market logged a distribution day across all the indices. Historically, this has spelled doom for a new rally 90% of the time. Still gun shy from my prior failures, I played it safe, moved my stop loss orders up, and stopped out of both positions in a couple of days.

Lessons Learned:

• Watching the market is important, but listen to the stock too. Both of these stocks were acting well and probably deserved some room to work.
• Trust the 5% stop loss. If I'm buying the right stocks at the right time in the right market, the 5% stop loss should protect me. I have to be careful moving stops, although I will do so to put it near key support levels when the situation calls for it.
• Don't be afraid to lose money. I should feel fear before buying a stock, not after. I should imagine how I will feel if the position doesn't work out, and if I will regret the purchase. Once I determine it is a sound buy, I should leave the stock alone and let it work (within reason).

All in all these positions were listed as a 'Push' - neither a win or a loss. They went on to be winners, but there was a strong argument for selling at the time that I did. I bought good stocks at the right time and sold for a sound reason, so I consider these fair trades that I do not regret.

I'll get into some trades that I do regret in my next post...