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Author: GFPE Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 24974  
Subject: Good Chart, Bad Chart Date: 3/7/2000 5:25 PM
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With the swings up and down in the volatile and momentum-driven biotech stocks, it seems that a lot of people over-react, either with too much euphoria on a good day or too much pessimism on a bad day. How do you know when momentum might start flagging and a top might have been reached? Well, for the LTBH person this is a different question than that for the momentum and TA-based trader. For the LTBH growth investor, I assume that you only really want to sell when it looks like a stock has seriously flattened out in growth. Looking at daily changes or short-term moving averages are not appropriate tools for evaluating this. Instead, you'd look at the 50- or 200-day moving averages. If you look at these, none of the high-octane biotechs look like they have exhausted their momentum at all. It's useful to compare and contrast good charts and bad charts to get an idea of whether a stock is in trouble or not and what the depth of the trouble is. In each of the cases below, I'd hold and keep holding as long as the long-term moving averages look like the following for "Good Charts," and sell only once the charts start looking like the "Bad Charts."

Good Chart (HGSI): http://finance.yahoo.com/q?s=HGSI&d=1ym

Bad Chart (DELL): http://finance.yahoo.com/q?s=dell&d=1ym

In fact, for DELL compare the 1-year chart above to the 5-year chart: http://finance.yahoo.com/q?s=DELL&d=5ym
The 5-year chart has steeply sloped long-term moving averages up until about a year ago. But when even the 200-day moving average has changed from a positive slope to a flat one, that's a sign that the stock may have transitioned finally from growth stock to tired stock. You could have seen it early-to-mid last year for DELL and sold at that point, which would have allowed you to then put your money into better performing stocks. All by looking at the slope of the long-term moving averages.

Good Chart (JDSU): http://finance.yahoo.com/q?s=JDSU&d=1ym

Bad Chart (MSFT): http://finance.yahoo.com/q?s=msft&d=1ym

Notice for MSFT, how half-way through 1999, it was clear from 200 DMA that the stock had lost its fizzle. That's a chart saying it might be time to move on, even for LTBH investors, since you may losing out on better opportunities. That's not to say the stock might not become attractive in the future, but since the long-term moving averages have flattened so much that represents a lot of inertia that would have to be overcome. A change won't happen fast. If you were still interested in the stock, you could then keep an eye on shorter-term moving averages to see when might be a good time to get back in but the flatter the long-term moving averages get, the harder such a sustainable transition appears.

Good Chart (MLNM): http://finance.yahoo.com/q?s=mlnm&d=1ym

Bad Chart (PFE): http://finance.yahoo.com/q?s=pfe&d=1ym

So...

If you're a growth-oriented LTBH investor, you should study momentum in the long-term to your advantage. Hold good stocks as long as possible, but don't be afraid to sell, even if the company is still strong but the market is just sour on it. You want to have good companies in sectors favored by the market, right? Anyway, the momentum behind the lead companies of the new biotech era still looks strong as ever; we just had one bad day across the markets.
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