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!

21 October 2007

Rules by which to abide

I follow a general rule: that no matter how smart a person might be (me included), he or she might be smarter than anybody, but not smarter than everybody. Thus, in life but especially when investing, I abide by a specific rule: listen always to the market's message. I find the more I listen to the market's message, the more consistently successful my investing; the more I listen to myself, the less consistent my investing.

To hear better that message, I rely on four items: price, volume, pattern, and continuum (trend). Each of these items generate their own interpretations and (re-) actions.

Within the guiding notion of pattern analysis is the perception of support and resistance; what once was resistance becomes support, and vice-versa -- if identified correctly.

Please note the bases (delineated) in the chart of J Crew/JCG (below) -- at least until this most recent attempt to build a new intermediate term base.

[click on chart to enlarge]

Whereas the stock turned up precisely when and where it should have in the first two bases, the third attempt failed. "Should have" because $40 represented the last breakout to new intermediate term highs and the plotting for the 200 day simple moving average (sma) was also at ~$40; thus, a stock in a bullish position should have turned up at this point, if it had even lanquished on crucial support for this long a while.

After having purchased my most recent lots at ~$40 during the Spring (April and May), I was of course gratified when the shares surged to $57. But with any swing up comes a contra swing down, which can be meaningless depending upon your time frame and objective. So I have in place another rule: when successful (e.g., JCG to $57 from $40 in one thrust), acknowledge and embrace the coming downswing -- as long as it does not dip beneath the previous base. When the stock turns up again to new highs, [I] change the trailing stop to the area of the former high (~$57 for JCG). I predicate these high and low trades on intermediate term bases. Most often this strategy works, sometimes not; but it does allow a short term trade to morph into a long term investment. Recent examples of the former would include Google/GOOG and Intuitive Surgical/ISRG; one example of the latter would be, alas, J Crew/JCG. iow, in re to this opportunity (JCG), I was wrong.

Which leads into another rule by which I abide: never allow a profitable holding to deteriorate into a loss. I always will grant a stock sufficient leash to become a long term investment; I never will allow that leash to become a noose.

An item to note: point 1 in the middle base. Note that its lowest trade of the entire 6-month intermediate term base occurs at the end of the correction, not early on as in the more typical occurrence. This too could occur with the shares today (point 2) albeit with one major exception: the day the shares traded at the low of point 1, they also reversed and closed on their highs. Friday's action is not similar, although an inside bar or two is likely.

Despite this reality, and because I remain bullish on the opportunity for J Crew/JCG, I will continue to monitor the position daily awaiting a new pattern that screams, "Buy me!"

Until then...
Full Disclosure: J Crew/JCG, formerly a Core Opportunity, now ø.
-- David M Gordon / The Deipnosophist

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