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 July 2009

A (winning) position is a good thing to manage

So you have an investment that defies the so-called experts, and just keeps rising in a profoundly powerful up trend. What do you do?

Well, first pat yourself on the back: your initial step -- to buy and hold proves correct. Now you wonder, whence the ideal moment to sell? When does a trend of extreme strength become the moment of obscene strength? Consider the various constituencies:
1) Short-sellers must cover in a capitulative, melt-up run;
2) Short term longs (such as Louis Navallier) who buy and sell, buy and sell, buy and sell, now finally buy and hold, which also gooses the stock short term;
3) Long term longs (such as me) begin to sell their holdings, phasing out quietly.

I have shown (on this blog) the methods to identify these first 3 steps, so I doubt the necessity to reiterate them now.

Because I am the happy holder of Green Mountain Coffee Roasters/GMCR (long, now, for a whopping $40/share profit, ~125%, in a mere 4 months), I thought I would share several possible scenarios and my potential actions...

[click on all charts to enlarge]

First things first. I know, I know, the GMCR chart (above) finally looks especially auspicious to you, but please note intermediate term price resistance occurs at ~$75. (Please use the methods and tools shared previously to identify that price resistance.) Let's examine my time frame...

The salient fact re GMCR's chart is that its price rise begins to wax parabolic. All chart action reveals subtle clues as to when a trend or pattern will exhaust itself; again, because I have shared previously many excellent methods to age trends, I will not repeat those lessons.

When presented with, as I term it, a trend of extreme price strength, I seek the moment of obscene strength -- typically, a large upside gap that reverses itself that same day or week, and causes a key reversal day. Or, even worse, a key reversal week. I do not wait for the reversal, because the upside price action is prefatory to the reversal. So...
Scenario 1): GMCR breaches above intermediate term price resistance with an opening gap, and rises quickly to my long term price and value objective ($80-$100) before a key reversal. Sell (or lighten your holding) on the gap.
Scenario 2): GMCR floats higher to intermediate term resistance, and declines gently into a new intermediate or long term base, to allow the outlier PE multiple to contract to a more normal relationship. Hold.

One great item about investing is that a price objective thought to require years sometimes needs only a handful of months. Interestingly, as Green Mountain/GMCR possibly accelerates its share price rise, the company reports its quarterly earnings after the close on Friday, 31 July -- which means the next ~2 weeks could be even more profitable, and more rapidly so, for those lucky investors long Green Mountain Coffee Roasters/GMCR.

Full Disclosure
: (Still) long Green Mountain Coffee Roasters/GMCR.
-- David M Gordon / The Deipnosophist

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