Breakout Stocks: The Quest For Stock Market Gold
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I find the stories about the California Gold Rush era fascinating because
at few other times across the course of human history, could a person of
modest means potentially achieve great wealth. Though the quest for gold
was not always easy for the 49ers, and not all of them achieved wealth,
once they literally “staked their claims, ” each person had the same
opportunity to achieve instant riches as the next. The Gold Rush was the
great equalizer. Finding great stock trading opportunities is, in a way,
like the 49ers ‘ quest for gold, in that anybody– whether young or old,
rich or of modest means, male or female– has a chance to create wealth
for him or herself. But finding a shinny nugget at the bottom of your pan
is one thing, while finding those select stocks that have the most
explosive upside potential is quite another. Today, I know why trading a
stock just as it breaks out can lead to explosive gains, and I know the
thrill of watching a quality stock quickly swell my portfolio, but this
was not always the case. In fact, I tried out just about every other
stock trading strategy first, because I found studying stock charts
tedious and confusing. Which stocks should I concentrate on? What should
a stock ’s chart look like? What moving averages should I use? Which
oscillators are the best? You would think that as an executive at a
financial television channel, I ‘d have the inside track on slick ways to
trade the market, wouldn ‘t you? After all, I regularly rubbed elbows
with some of the most influential stock market gurus on the financial
seminar circuit. There was only one thing. Each individual was busy
selling his or her own unique stock trading strategy. As I bounced from
trying one trading strategy to the next, I began to realize that many of
these techniques did not work as predictably as I had expected. At one
point, I even turned to penny stocks thinking they were the way to make
big money in the market. After all, 5,000 shares of a stock made you feel
like a pretty big investor. But in the end, even a $1.50 stock could
become a .75 stock overnight, on some little ripple in the company ’s
game plan, and poof! Half your grubstake…gone! And, since penny stocks
are usually so thinly traded, it took a “month of Sundays ” just to
execute a sell order. Meanwhile you watched as your sell order
single-handedly brought the stock ’s value down far below what you were
hoping to get for it. The shortcomings of many of the stock trading
strategies I tried only made me more determined to find a more
predictable way to make money in the stock market. My epiphany came while
turning the first few pages of a book on stock charts that had been sent
to our television station by the publisher. The book had been sitting on
a bookshelf in a corner of my office for some time collecting dust. The
book? Analyzing Bar Charts For Profit by John Magee. Magee was talking
about how the field of technical analysis developed, beginning with the
early moving averages developed by Charles Dow dating all the way back in
1884. As I read, three things occurred to me. 1. First, some very smart
people had been hot on the trail of finding a system of using charts to
anticipate stocks ‘ movements for a very long time. 2. Second, charts
represented the only visual, factual record of a stock ’s movement that
was not filtered through some financial news analyst or stock market
guru. 3. Third, and most important, it actually seemed plausible to make
reasonable assumptions, based upon certain charts, as to when a stock was
nearing its greatest potential. Could I have finally found the “holy
grail ” to stock profits I had been searching for? Of course, nothing is
ever as simple as it seems at the outset, and quite frankly, the study of
charts took me far deeper into technical analysis than I ever had
intended to go. Yet somehow the quest for a more definitive way of
knowing when to buy high-potential stocks had grabbed hold of me, and
wouldn ‘t let go until I had some hard and fast answers. I read every
book on charting techniques I could lay my hands on. At night, armed with
my charting software, I ‘d download a list of stocks and stare at their
charts trying to discern what they were telling me. William O ‘Neil ’s
“How To Make Money In Stocks ” helped me to better understand the
relationship between a stock ’s daily price action and its volume.
Slowly, after what seemed an eternity, I began to spot the chart
patterns. Of course gaining knowledge about technical analysis is one
thing, and putting this knowledge into practice is quite another. Here
again, there was no shortcut. No abbreviated course. No quick cure. I had
to rigorously trade stocks based upon my assumptions about a stock ’s
chart. I ‘d hear seasoned traders say this is a process that takes about
four years of frustration, elation and often, disillusionment. They
weren ‘t kidding. Once I emerged from this “birth of fire, ” I had a
newfound respect for the market forces. Gone was any pretense of
cockiness or self-pride. I felt almost as if I had achieved a kind of
“warrior status. ” In the end, I learned that trading stocks just as
they broke out was simply the most dependable way to make money I had
ever been exposed to. There wasn ‘t any guarantee, there were still
surprises, and not everything worked out exactly as planned, but when a
stock ’s time had come to break out, there just was no quicker way to
make money. These days, I usually begin my search for stock market gold
by scrutinizing a company ’s fundamentals and choosing the best of the
best. Why? Because a leading company has an established track record for
executing a successful game plan, and is less likely to surprise you with
negative news. Believe me, with all the varying factors that you have to
contend with in trading stocks, you at least want to have your best
players on the field. Why would you want anything less than your top
quarterback in the Superbowl? The same thing applies to stocks. Does the
company have successive quarters of earnings increases? How does the
company stack up to others in terms of its “relative strength, ” or
price stability? Is the company in a strong industry group? Is the stock
under accumulation by mutual fund companies? Then I look at the stock ’s
chart. Here ’s where things start to get exciting, because breakout
stocks form certain time-tested patterns just before breaking out.
“Time-tested ” does not mean foolproof, but from a cup-with-handle,
double-bottom, flat base, or other types of chart patterns, you can begin
to discern the telltale signs of pent up demand. The stock may drift
sideways, or slightly downward as if it is disinterested in going any
higher. Meanwhile, it ’s daily volume drops to a whisper. It ’s almost as
if the stock is sleepwalking. A lot of traders take this to mean there is
no interest in the stock. Nothing could be further from the truth. One
day, the stock seems to turn on the afterburners, and you see this
explosive burst of volume that exceeds anything the stock recently seemed
capable of. You silently watch in awe as this stock breaks through its
resistance/buy point and then heads skyward. Then, as you watch your
profits mount, you sit back in your chair and allow yourself a brief
moment to reflect on the thrill that the 49ers must have felt, because in
your own way, you ‘ve just hit paydirt. For more information visit
StockConfidential Copyright © 2005, Paul Johnson
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