…Hansen Natural Corp. (HANS) has gained a total of 37% for MSW community members since debuting on the weekly screens May 7, 2005 at $66.56. The closing price on Friday, July 8, 2005 was $90.97, only $10 away from the triple digit threshold. The stock had already run up over 1100% ($5 per share in August 2003) at the time I decided to start coverage. Several community members sent me e-mails asking why I would only start to profile a stock after a huge 11-fold run. My answer was simple: The stock is in a strong long term up-trend and the direction of the stock doesn’t show signs of changing at this time. The point and figure charts continue to provide me with ample opportunities to initiate a new position or add shares to an established position.

Taking a quote from William O’Neil, I also believe in the “buy high and sell higher” philosophy. HANS serves as the perfect example of this theory. Most of the stocks covered on this website are at or approaching new 52-week highs. Every MSW all-star stock listed in the left hand column of our site has been or was trading at new 52-week highs as they made gains of 100% to 300% in less than one year.

HANS has been featured in 9 weekly screens and highlighted in almost two dozen daily screens since its debut in early May. I continue to say that stocks that make multiple weekly screens tend to be the strongest performers among their peers, regardless of their current price level.

Many novice investors have a difficult time buying stocks that have already advanced a couple hundred percent or are making brand new 52-week highs. They fear that the stock will start to fall and lose money when they enter. Other inexperienced investors try to short stocks such as HANS because they feel that the stock is too high or extended. They start shorting the stock with no other reason than the current price level. This may be one of the biggest mistakes an investor can make as the stock must give you other reasons to become a short candidate; such as decreasing earnings, a new downtrend on the charts, breaking major moving averages or all of the above. Jesse Livermore once said: “stocks that appear high to one investor; may be low to another.” Hansen demonstrates this trait more than any stock of recent memory. An emotional battle must be fought for any level investor when they purchase a stock that is already up over 1000% in one or two years. Basic logic would say to sell the stock short because it must come down. The market isn’t logical or efficient and that is why we follow strict rules and study chart analysis, also known as technical analysis when making market decisions.

Using the 50 day moving average as support, we can establish new positions in HANS as it pulls back to the line and holds tight as it continues to rise. We will not raise a red flag until the stock starts to act out of character. A quick glance at the fundamentals and a long term weekly chart will show us that the stock has acted according to character for over two years. HANS also entered the $60-$100 fast track theory that I have been speaking about in great detail on the daily and weekly screens. We all see that HANS crossed $60 in early April and then again in May and has quickly moved to over $90 per share in two to three months with a 40% gain. As I finish editing this article, the stock is currently trading at $92 on July 11, 2005. I am not ready to sell and will not consider selling until I am given a reason by either the stock itself or poor general market conditions that affects my stock.

When speaking about buying stocks at high prices and then selling them higher, I can offer you a few reasons why this is very sound advice. Stocks at new 52-week highs don’t have any overhead resistance or weak holders that are looking to bail on their position, forcing the stock to slide. The stock can continue to take off and give its investors the best return possible with only minor healthy corrections. A minor healthy correction should always come on below average volume. Stocks at new 52-week highs also have the strongest relative strength ratings, compared to the remaining market, making it attractive to institutional investors that haven’t jumped on board.

If you haven’t noticed by following my latest final weekly screens, stocks that make new highs, continue to make new highs. Since solidifying our weekly screens to the top 30 stocks in the market with the best probability of moving higher, we have witnessed a handful of these candidates with double digit gains in only 6 weeks. Never discount a stock because it seems too high or because you can’t purchase 1000 shares. Investors should only be concerned with the final percentage gain on each position rather than the high price of the stock, the small number of shares you can purchase due to the high price or the recent positive action (doubling the past few months).

Newton’s law of motion states: “An object at rest tends to stay at rest and an object in motion tends to stay in motion with the same speed and in the same direction unless acted upon by an unbalanced force.” Objects keep on doing what they are doing and stocks follow this same logic. So please, don’t sell a stock short because your own logic tells you that it is too high, because you may come to find out later that several institutional investors thought it was still too low.

Piranha

…Here is a question I received today that may relate to many of you:
“I have a question. IBD and O’Neill talk about how breakouts from 4th or late stage bases can be faulty. How do you know that it’s in a late stage base. If the stock has been around awhile, isn’t it likely to have had a number of uptrends and a number of levelings off?”

Late stage bases always happen with a stock after several years of up-trends. The builder stocks are the prime example right now. Early last year, the education stocks were the example (COCO, CECO, APOL). A forth or fifth stage base does not have to fail, it can be successful but based on O’Neil’s study of past stocks, these late stage bases have a higher probability of failing. In the stock market, the main focus is to lower your risk making me agree with O’Neil when he says to beware of late stage bases. Take a look at the builders and then the three education stocks above. They all had many up-trends and pattern building stages since 2000-2001. I owned a good deal of Corithian College earlier this decade and have vast knowledge about the company and stock but have not looked back at the stock in great detail since the sell. It does not mean that I can’t buy the stock again but it has not crossed my screens so I don’t bother. If COCO started to cross my screens in 2005, I would not hesitate to buy it again if the opportunity presented itself.

Once a late stage base fails and undercuts the previous base, the counting starts from one again and it is no longer qualified as a late stage base. Base counting is a gray area if you follow some examples in O’Neil’s books. The builders are amazing and have been for years (since 2000). I would not be surprised to see them breakout again but they are in late stage bases as clearly seen on the longer term charts. Failure has a greater chance now than it did 3 years ago in this sector. Play with the odds in the market because no one knows what will happen but lowering your risk will always allow you the chance to make greater profits.

Bases can go back several years as was the case with the commercial services/education stocks. You may not be familiar with these stocks as they have not made screens in the past two years but I always talked about these stocks on past forums and articles. I was in love with this sector in 2002, especially when we were still in the bear market. As for builders, take a look at the 5 year chart on bigcharts.com. The site is free with a java chart that will allow you to look at detail with an interactive touch. Looking at a 5-year chart for HOV (K. Hovnanian) which is hitting new highs as we speak, an investor can see the five bases that have formed with the recent base (pattern #5) currently breaking out from a condensed cup shape. Set the chart to the 5-year option with weekly bars. Even using monthly bars, an investor will clearly see at least four bases. You will notice that each base stays above the prior bases which allows the number to creep higher. If a late stage base failed and broke down, the number count would start fresh from one.

This was the case with Corithian Colleges (COCO) and the action that I witnessed in early 2004. The late stage base failed and the stock took a steep dive lower than the previous base, resetting the number to one. Corithian is now building a new base but sits well below the all time high and has not made any recent screen on MSW. Please take a look at this 5-year chart to see how many bases formed and then the stock finally collapsed after a tremendous run. If you do not have access to the charts, I will try to post a case study detailing both HOV and COCO so you can spot a late base breakdown in the future.

Piranha

The simple answer is yes. Some publications suggest that buying stocks less than $12 or $15 is very risky. This is true but it’s not as risky if simple investing rules are implemented such as cutting losses quickly. (Note – I will pound this one rule into your head as long as I run this community – cutting losses quickly is the single most important rule to successful investing).

William O’Neil and IBD recommend buying stocks above the $12-$15 threshold. I also recommend this to novice investors as higher priced stocks usually don’t have the extreme volatility that some lesser priced stocks have, due to smaller floats. Personally, I am comfortable in my philosophy and have strict rules in buying and selling all types of stocks at all price levels so I feel that I can take on the added risk.

If you read MSW closely, you will notice that many sub $15 stocks are highlighted on daily screens, weekly screens and case studies. Even IBD will include sub $15 stocks in their charts, sector highlights and New America articles. Buying stocks under $15 does present higher risk but a closer study into our screens will reveal that a solid chunk of our All-Stars have started their triple digit up-trends when they were still below $15. A closer look at the IBD 100 will also reveal that a good portion of these stocks broke out while they were still under the $15 threshold.

You must do what is most comfortable for you. When I first started teaching this philosophy on the internet, I told new investors to stay above $12 and I still believe that this is good advice. As a novice investor becomes more experienced and has endured a few losses and cut a few losers quickly, they can start to take on positions with more risk. I don’t advocate buying stocks under $5-$6 except in very specific cases.

If you go back and study the weekly screens, you will notice that 7 of the top 10 MSW All-Star stocks of 2004 started their runs below the $15 threshold. I highlighted these stocks on weekly screen over and over as they advanced from these sub-$15 levels. (2004: ALDN, NGPS, ELOS, DHB, ESMC, TRGL, DCAI).

As your investing experience grows and you start to review past trades, only you will be able to determine if sub $15 stocks are right for your portfolio.

Piranha

…The pivot point can be calculated as the stock is forming the handle on a cup-with-handle base. The ideal buy price would be $0.10 higher than the highest spot during the handle, also know as the top of the right side of the base. The highest point can be the intraday high and not always the closing price of the stock. If the stock closes at the high for the day, then we will use this number. We look for the ultimate high on the beginning stages of the handle.

The exact methods used for finding pivot points vary depending on the base that is forming.

On a flat base, you would look for a move $0.10 higher than the top point on the left side of the base or the start of the formation.

A saucer-with-handle would follow the same rules as the cup-with-handle.

A double-bottom formation would set the pivot point at $0.10 higher than the middle peak in the “W”.

As I mentioned in the previous blog post, we do not buy until the stock triggers the pivot point on above average volume also known as qualifying volume. This is the area where the stock faces the least amount of resistance as all overhead sellers are gone as we break into new high territory. The pivot point usually comes within 5% to 15% of the stock’s old high. Try not to buy a stock after it is 5% above the proper pivot point. This does not mean that we can’t buy on normal corrections and pullbacks as the stock remains in an uptrend. The rule only applies to the pivot point area as the stock becomes extended.

Piranha

A great question was asked through e-mail by one of our fellow members:

Why wouldn’t you purchase ELOS now before the right side of the base is finished forming?



A stock must finish the base before it is bought because most stocks that don’t finish the base continue to trade sideways for months or years or start to breakdown as the speculators bail by selling their positions. The line of least resistance or the pivot point is the best place to buy as the stock is breaking out to new highs. Remember, many people bought ELOS at the top of the left side of the base near $39.

These investors have suffered through paper losses waiting months to sell at break even which would be at or near the top of the right side. When the price nears the old high, most weak holders will sell out happy that they broke even. This selling action usually occurs in a week’s time thus forming the handle and shaking out weak investors on lower volume.

After the institutions see that these weak holders have sold, the real party starts with a breakout on above average volume – the pivot point. Once the stock breaks out and goes on to a new high, there are no more sellers because the stock has never been in this territory. There is no resistance above this pivot point.

This is why we wait to allow the stock to prove itself and buy properly at the pivot point. ELOS may never complete the base but if it does, I will post the precise pivot point and volume levels needed to qualify.

Finally, if you buy ELOS now, it would be pure speculation and your risk levels would be raised based on history. I would prefer to buy higher when there is lower risk of a breakdown because stock holders might want to sell old positions from the left side of the base. In addition, the current market is in correction mode giving us more reason to wait for this base to form properly, keeping our risk lower than it is today.

This was an excellent question and I hope many of you learn and study past breakouts to understand this rule better.

Piranha