A very important technical tool that savvy investors have learned to incorporate in their technical analysis is the 50-day moving average (DMA) line. The 50 DMA line plays a pivotal role relative to a stock's price. If the price of a stock is above its 50 DMA then odds are that its 50 DMA will act as formidable support. Conversely, if the price is below its 50 DMA then the moving average acts as resistance. Healthy stocks sometimes trade under their 50 DMA lines briefly, but usually a strong candidate will promptly bounce and repair a 50 DMA violation. When a stock has violated its 50 DMA line and then lingers beneath it, the stock's outlook gets worse and worse as it spends a greater period of time trading under that important short-term average line. Once the 50 DMA line starts sloping downward it should also be acknowledged that the stock has been struggling for a while, and it might be time to reduce exposure and look for places to put that money to work in stronger buy candidates.
Flowserve Corp. (FLS DOWN -$15.09 or -15.16% to $114.65) triggered technical sell signals as it violated its 50 DMA line and a well defined multi-month upward trendline with a considerable loss on above average volume. FLS still sports strong ranks; its Earnings Per Share (EPS) rating is 96 and Relative Strength (RS) rating is 97. This stock was first featured on Thursday, February 28, 2008 in the CANSLIM.net Mid Day Breakouts Report (read here) with a $102.84 pivot point and a $107.98 maximum buy price and the following note: "Y - Gain on above average volume today for a new all-time high after its latest strong earnings report for the quarter ended Dec 31, 2007. It has a history of strong quarterly earnings and sales revenues increases. Recently crept quietly to new highs from a choppy base-on-base type pattern." It found great support near its 50 DMA line after it was featured, and subsequent bullish gaps up were indications of institutional buying demand. Disciplined investors stick to buying stocks within the investment system's guidelines and then always stand ready to take swift action whenever they see a definitive technical sell signal.
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It is not uncommon for leading stocks to pull back after breaking out. Ideally, volume is lighter when the stock retraces back toward a chart support area such as prior chart highs, an upward trend line, or a key moving average such as the 50-day moving average or 200-day moving average. Violations of these technical support levels are a concern, and they are a much greater concern when they occur on higher than average volume. It is especially worrisome when the volume on the down day exceeds the above average volume which had accompanied the prior gains.
Flowserve Corp. (FLS +$1.30 or +1.19% to $110.72) enjoyed a new all-time high close today with a gain on below average volume. FLS sports a strong Earnings Per Share (EPS) rating of 93 after posting healthy increases in the earnings and sales department in recent quarters. All four of its most recent quarterly comparisons showed earnings increases of greater than the +25% guideline. This stock was first featured at $106.18 on Thursday, February 28, 2008 in the CANSLIM.net Mid Day Breakouts Report (read here) with a $102.84 pivot point and a $107.98 maximum buy price. Its breakout failed as the stock fell back into its prior base and eventually found support near its 50-day moving average (DMA) line before rebounding impressively. The stock is working on a choppy 5-week base and may need more time to form a sound base to be buyable under the guidelines, so it should remain on a healthy watchlist
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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.
Flowserve Corp. (FLS +$1.54 or +1.41% to $110.44) ended modestly higher on slightly above average volume today as this stock continues to consolidate its recent move. FLS sports a strong Earnings Per Share (EPS) rating of 94 after posting healthy increases in the earnings and sales department in recent quarters. All four of its most recent quarterly comparisons showed earnings increases of greater than the +25% guideline. This stock was first featured at $106.18 last Thursday, February 28, 2008 in the CANSLIM.net Mid Day Breakouts Report (read here) with a $102.84 pivot point and a $107.98 maximum buy price. Since then it has held up fairly well while the market has encountered heavy distributional action. The stock is currently trading above its maximum buy price and perched below its all-time high of $112.32. The stock is currently considered too extended from a sound base to be buyable under the guidelines, but it remains a strong stock that should remain on a healthy wathlist if it pulls back on light volume and the market manages to hold onto its ailing rally.
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