A very important technical tool that savvy investors have learned to incorporate in their technical analysis is the 200-day moving average (DMA) line.  The 200 DMA line plays a pivotal role relative to a stock's price.  If the price of a stock is above its 200 DMA then odds are that its 200 DMA will act as longer term support.  Conversely, if the price is below its 200 DMA then the moving average acts as resistance.   Obviously, if a technical breakdown or violation takes place on heavy volume it is a more serious concern.  Sometimes quiet violations are repaired quickly, without a lot of additional losses.  However, the key moving averages are always an important line to watch.  

Dril-Quip Inc. (DRQ -$4.05 or -9.19% to $40.01) plunged below its longer term 200 DMA line for a considerable loss on very heavy volume, further deteriorating after the prior session's gap down below its 50 DMA and violation of earlier chart lows.  This technical damage came immediately after the company said earnings for its latest quarter increased +11% while sales gained +6%, which was significantly lower than recent, stronger, quarters.  Whenever a stock plunges on a tepid earnings report it is a clear technical sell signal based on fundamental weakness.  Paying attention to a stock's reaction to earnings is as important, or sometimes more important, than the actual results.

DRQ was first featured in the April '07 issue of CANSLIM.net News (read here) with a $44.78 pivot point and a $47.02 maximum buy price. One week later, on Monday April 9, 2007, DRQ triggered a technical buy signal when it blasted above its $44.78 pivot point on the necessary volume (at least +50% above average) to trigger a technical buy signal. In the first few weeks, the stock surged an impressive +18%.  However, it negatively reversed from a 52-week high on April 30th, 2007, and the very next day it gapped down on massive volume after reporting quarterly financial results. In a two day period, DRQ gave back its entire 18% gain. It spent the next few weeks building a base-on-base pattern.  By definition, the lows of a base-on-base pattern correspond with the highs of the stock's prior base. Most disciplined investors would have sold it earlier and avoided the recent disappointment.  On June 26, 2007, when DRQ sliced through support, the action was summarized in the CANSLIM.net After Market Report as follows - "The technical deterioration of the stock would be hard to ignore, as the entire base-on-base pattern might be negated. If the bulls do not promptly show up and quell the bearish selling above this key chart support level, further declines become even more likely. As always, strictly selling whenever a stock falls 7-8% from your purchase price is the best way to prevent greater losses."  As of tonight this stock will be dropped from the CANSLIM.net Featured Stocks list.

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In the first few weeks after DRQ was featured in CANSLIM.net News, the stock surged an impressive +18%.  However, it negatively reversed from a 52-week high on April 30th, 2007, and the very next day it gapped down on massive volume after reporting its latest quarterly financial results. In that two day period, DRQ gave back its entire 18% gain. It spent the next few weeks building a base-on-base pattern.  By definition, the lows of a base-on-base pattern correspond with the highs of the stock's prior base. Therefore, DRQ is at a critical juncture now, and it is of the utmost importance to not see the stock's December 8, 2006 high close of $44.15 breached with a lower close.  Otherwise, the technical deterioration of the stock would be hard to ignore, as the entire base-on-base pattern might be negated. If the bulls do not promptly show up and quell the bearish selling above this key chart support level, further declines become even more likely. As always, strictly selling whenever a stock falls 7-8% from your purchase price is the best way to prevent greater losses. 

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A classic example of the success enjoyed by many CANSLIM.net readers usually starts when an investor reads a CANSLIM.net report and buys a featured stock before it has risen above the pivot point by greater than 5%.  After a stock breaks out above its pivot point, there is only a +5% window that investors have to purchase the stock under the proper guidelines. Once a stock rises above the "maximum buy price" the risk of a shake out balloons, meaning that even a normal retracement in the stock might force you to employ the 7-8% loss cutting rule.  Much can be told by the stock's daily action in the weeks and months that follow a breakout. Typically, a light volume and orderly pullback suggests that the bulls remain in control.  However, high volume pullbacks that violate support paint a totally different picture.

Dril-Quip Inc. (DRQ +$0.33 or +0.63% to $52.04) has continued marching higher after breaking out of a sound base earlier this month. This stock was first featured in the April '07 issue of CANSLIM.net News (read here) with a $44.78 pivot point and a $47.02 maximum buy price. One week later, on Monday April 9, 2007, DRQ triggered a technical buy signal when it blasted above its $44.78 pivot point on the necessary volume (at least +50% above average) to trigger a technical buy signal. That action was discussed in greater detail in the Monday April 9, 2007 CANSLIM.net After Market Update under a headline that read "Oil Equipment Stock Drills Its Way Through Resistance" (read here). The stock's post-breakout action has been admirable.

In four short weeks, DRQ has traded up +17% above its pivot point, and the odds favor even further gains, however it is too extended to be considered a proper buy candidate now.  While it steadily hit new 52-week highs, in the process it also traced out a well-defined steep upward trendline. Whenever that trendline is breached it could be considered an early sell signal, and the next important chart support level would be all the way down near its December 2006 chart high ($44.68).  The "C" criteria remains strong, as the company managed to increase its earnings per share over the year earlier by +75% and +85% in the two latest quarters ended September and December of '06. The company is slated to report their first quarter results in early May, which typically can lead to extra volatility. As always, strictly selling whenever a stock falls 7-8% from your purchase price is the best way to prevent greater losses.

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CANSLIM.net Profile: Dril-Quip, Inc. designs, manufactures, and services engineered offshore drilling and production equipment for use in deepwater, harsh environment, and severe service applications. The company has operations in North and South America, Europe, Africa, and the Asia-Pacific. It serves integrated oil and gas companies, independent oil and gas companies, and foreign national oil and gas companies that focus on offshore exploration and production, as well as offshore drilling contractors, and engineering and construction companies. The company was founded in 1981 and is headquartered in Houston, Texas. DRQ has increased its earnings over the year-ago period by +267%, +179%, and +115%, and +91% in the past four quarterly financial reports for periods ending in March, June, September, and December ‘06, easily satisfying the “C” criteria, but the sequentially decelerating growth rate is a concern. During those respective quarters the company managed to increase its sales revenues by +40%, +35%, +24%, and +25%.  Return on Equity of 22% is higher than the +17% guideline.  The company hails from the Oil & Gas - Machinery/equip group which is presently ranked 7th on the 197 Industry Groups list, which is a very reassuring position concerning the "L" criteria.  The number of top-rated funds with an ownership interest has risen from 114 funds in March ‘06 to 130 funds as of December '06, a compelling sign of increasing institutional interest (the "I" criteria). 

What to Look For and What to Look Out For: Look for DRQ to breakout of a 13-month long base with gains backed by at least +50% above average volume. The ideal time to purchase a stock is when it blasts above its pivot point on above average volume, which successfully triggers a technical buy signal only when accompanied by sufficient volume. Ideally, one would like to see the stock follow through in the days that immediately following its journey into new high territory. If, after the buy signal is triggered, a stock reverses and falls back below its pivot point by more than 7% it would more than negate the breakout, then odds favor it moving even lower. The reason why it is imperative to wait for a fresh technical buy signal to be triggered is because prior resistance levels are often stubborn barriers which the market recognizes.  Always limit losses per the 7-8% sell rule, and never hold a stock if it falls more than that much from your purchase price.