The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

15 March 2006

Time is of the essence

Okay, this has been a difficult week -- and it is only early-Wednesday morning as I type! Monday afternoon brought with it a complete waste of (too) many hours at the office of an ophthamologist. I had considered writing a post about that escapade, but I found it difficult to restrain my venom. Yes, I was that angry. Then yesterday, I simply could not access e-blogger; neither to post nor to comment. Alas, those problems continue this morning, inhibiting my ability to write this post. (Allan, did you have any difficulty?) I had hoped to write and post this commentary yesterday. But here it is, finally; perhaps shortened somewhat to allow for the imminent opening of today's markets. I hope its clarity is better than prior attempts.

Many readers have requested another, (but better) explanation of the time & price continuum. I have an investing maxim (thanks,
Bob Koppel!) that states, "
Focus on the process, not on the result." So that is precisely what I hope to accomplish with this post: limn a specific pattern, its process, its rules, its expectations, and then point to current opportunities quietly building the same pattern.

Let's consider Apple Computer/AAPL. I have highlighted many distinct points on the chart (below)...

[click on image to enlarge]

1) The reversal day that serves to end the preceding up trend;
) The reversal day that serves to end the preceding down trend (readers will recall me mentioning same during that day);
3) The intermediate term base, which endures for almost precisely six months and manifests as a cup (of a cup & handle pattern);
4) The breakout from the base into new all time highs;

5a) The handle (of the cup & handle pattern). Note its duration (~3 weeks), and
5b) Its diminution of volume;

6) The new up trend. (NB: its duration!);
7) The critical reversal that demarcates the end of that up trend.

And then the clock begins once again to tick anew ...

8) Critical (and long-ago forecasted) support at $63-62 has so far arrested deeper declines. In fact, these two lows represent a possible and potential double bottom;
9) Which would become a confirmed double bottom with a trade above the intervening high at $73
10) Before that occurs, however, AAPL shares must successfully breach (and close above) important resistance, the correctly identified trend line of declining tops, now at ~$67.50 (but round it up to $68 to factor in Point & Figure analysis); critical resistance lies above at ~71.6 - $73, which represents a Fibonacci retracement of the decline, the 50-day simple moving average (sma), in addition to the afore-mentioned $73 to confirm the possible double bottom.
11) If $62.50 proves to be the low end of the decline, then it sets up as comparatively shallow. Thus, this correction could be one more of time rather than price (despite the ~$25 decline from the high trade). Figure three months as a minimum and approximately six months as ideal.

Other examples of this type of pattern (and thus, opportunity) include but are not limited to,
Best Buy/BBY: emerging now from the handle (of a c&h pattern) but requires a substantial expansion of volume;
Garmin/GRMN: Building now its handle, from which it could emerge any day within the next 2 weeks, including today;
Intuitive Surgical/ISRG: Just tagged low #1 of a possible, probable double bottom, intermediate term base, bouncing off of critical support, the 200 day sma;
Marvell Technology/MRVL: Very shallow decline, as it heads for its first low of the pattern;
SanDisk/SNDK: Very near in both price and time to its first low trade and upside reversal.

Similar setups, although not at all the same include...
Google/GOOG: Breached critical support (200 day sma) but came screaming back on the news re the DoJ. Plenty of price resistance above as this pattern heals itself -- if it heals. (I re-purchased aggressively upon the sudden reversal in price and before I knew the news. Lacking immediate follow-through means I will not hold for long purchases made yesterday.) Not yet clear how this pattern will build, but it is possible it will endure for only three rather than six months before moving to new highs;
Teva Pharmaceutical/TEVA: Extraordinarily shallow decline (~$46 to $40), this probable base will likely prove to be one of time (and enduring ~6 months; thus, watch for its breakout between mid-April and mid-June).. and move higher explosively.

Two specific rules apply to the double bottom, intermediate term base...
• Typically, and assuming the pattern is a base and not a top, at least one of the two lows will tag the 200-day sma; if the first, that low will be deeper than the second low, if the second low, then that low will be higher than the first low. This occurs because the 200 day sma moves resolutely higher during a long term uptrend. I attempt to purchase within 10% of the presumed low.
• The base is typically six months because that is the disparity between the two simple moving averages, the 50 and 200 day. This then sets up the Gordon Upside Squeeze (for my long term readers).

The question thus becomes, "What do you think of this or that stock in (blank) time frame?" rather than, "What do you think of this stock?" Anyone could buy at any point along the continuum, albeit at inflection points. For example, consider again TEVA. It has all the hallmarks of a base rather than a top, and it is not guaranteed to endure as long as it could and might. So I am happy to accumulate as close as possible to $40 awaiting the presumed coming breakout at $46. But you could purchase the breakout, as the difference will scale to insignificance when the final high is registered.

There is no particular magic to this pattern, nor is it the Holy Grail of technical analysis (especially because it includes many different aspects of that discipline). I favor it however, because it affords me the opportunity to purchase an investment the market clearly desires but at a moment -- well, at any one of many different and varying moments -- of substantially reduced risk and maximum upside reward. An intermediate term base within a long term uptrend. Consider again Intuitive Surgical/ISRG. Some investor, some many investors, finally threw in the towel and purchased in the $130s. But why? Trend analysis -- an altogether different topic (and post) -- would indicate the tiring, and about-to-expire, trend prefatory to this intermediate term base pattern. For that eventuality, patience is its own reward.

I hope this explanation helps you to see better this pattern, and how the two axes, when used together, combine for a formidable setup. Can you point out other examples...? Please post them here as a comment reply.

Trade well, be well,
-- David M Gordon / The Deipnosophist

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