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Author: dbphoenix Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 23022  
Subject: Re: FORE! Date: 3/1/2001 1:09 PM
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Recommendations: 46

First, I can't think of any post made in the last three years that deserves a recommendation more than this one. I hope members will respond.

Second, there are a lot of details in your post that members can chew on and possibly respond to, as practice if nothing else. In order to be clear, however, I'd rather make this as simple and as brief as possible.

You are the last person who requires advice on developing a fundamental premise. Therefore, I won't go there at all. As to the float, however, as well as the institutional involvement, don't worry about it. A lot has changed in the last 14 years. Smallcaps may indeed stage their long-promised comeback or they may not. What the marketeer has to do is focus on what's happening, not on what he wishes would happen. One could argue that too many people have been burned by largecaps and that the orchestra is warming up for their swansong. But I wouldn't bet on it. The mutual fund industry has grown to the point where it has no choice but to emphasize mid- and largecaps.

But I promised to be brief.

The bar chart you think you're looking at isn't really a bar chart. Once upon a time, newspapers didn't report the open, hence the "bars" as shown in Weinstein. But any chart you look at online or in print will most likely be an OHLC. I suggest, however, that you get used to candle charts as they more graphically present the relationship between the open and close (this becomes more important as one's eyesight deteriorates). Line charts are excellent for filtering out noise and letting you see just where your stock is going: up, down, or sideways. If your frustration mounts, switch to a line chart of the close (and, separately, the high and the low, if you want a more accurate sense of where demand and supply are kicking in). This may provide the required aha.

As to this particular chart, I again suggest that you keep it simple. Forget about RSI, MACD, stochastics. I wouldn't even worry about MAs too much. If the base is long enough, the stock is going to be sitting on its 50d anyway, and perhaps even its 200d, and since MAs are trend-following instruments, and since a stock in a long base is no longer trending, the MAs are less important than the dynamic of the base.

I'll assume that you were able to get past the cartoons and read at least some of my site, so I won't repeat any of that here. In this instance, note that there is a line that can be drawn under this base -- a line called a "demand line" -- at around 87. This line was tested in October, November, December and January. A support or resistance line that has been able to withstand three tests is a strong line and should not be underestimated. In other words, if the stock were to fall below this line on heavy volume, or if it were to descend below this more gradually on lighter volume but show no inclination toward rebounding, something would be wrong.

Whether you were to act on that or not depends on your timeframe, your premise (fundamental and technical), your risk tolerance. You might want to see if it were to hold at 75, or 68, or 60. But a common error made amongst LTBHers is that they give the stock more and more room until it drops all the way back to the original purchase price, and even below that. Without a plan, you have no way of determining for yourself whether you want out at a breach of 87 or not. Think about all of this and reach a decision before the stock makes it for you.

Similarly, don't worry about how far the stock has come. Strong stocks will base, perhaps for the purpose of allowing their E to catch up with their P, in preparation for a further advance. You'll know whether this is a continuation base or a "Stage 3" base by how it reacts to the next test of the demand line, if any. If it drops below that line and doesn't rebound quickly above it, you just left a top, though circumstances can change, just as with earnings projections, and a sudden new wave of interest can manifest itself in the chart at just the moment you took your profits. In that case, you have to decide whether the story is worth buying again, or whether you should content yourself with a nice profit (perhaps the bulk of the ultimate profit) and move on to other opportunities. In other words, better safe than sorry.

(Note that Stage 4 doesn't necessarily imply a return to Stage 1 levels. Stage 4 may be relatively brief and the stock may undergo a new base-building period at a level not all that far from the Stage 3 dropoff point. This tendency of strong stocks to build new bases at levels higher than one might be led to expect can tie an LTBHer into knots. He often decides that all this sellstop, profit-taking business is hooey and that he'd be better off just holding on. Which is exactly the time that the particular stock he's studying decides to plummet to an all-time low.)

As for confirmation, since Cardinal is a holding company, keep an eye on the HCX (healthcare), and possibly the DRG (pharmaceuticals, which is probably dragging the HCX down). For added confirmation, find a couple of other stocks which are similar to CAH in business model and, preferably, chart pattern. Their activity may give you early warning or courage, whichever is required.

As a footnote, the Bulkowski book is more to be referred to rather than read, unless one is extraordinarily fascinated by all of this. The Schabacker book is an easy read. Easier than Edwards. And the charts are far easier to read. But the core of these and all the books recommended is what drives the markets: demand and supply. Everything is just detail. Relate everything you read to how it applies to the demand/supply equation and the whole thing will be much simpler than it may now seem.

--Db
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