Upgrade your membership to see all of the expert analysis we have published on IDSA now!

Whenever any stock breaks down into its prior base, it raises concerns.  When a stock violates its 50 DMA, or worse, its 200 DMA line, the technical deterioration should be recognized by investors as an indication that the stock will likely spend a longer time consolidating.  Meanwhile, a lot can go wrong, which is why hanging on to a losing position is dangerous and leaves investors vulnerable to more devastating losses.  The graph below shows a clear example of why investors should be disciplined about limiting losses whenever a stock buy falls 7-8% from your buy point.

Even though IDSA has predicted that its Q3 results should be up considerably over the year-ago period, the stock continues to trade light volume and struggle beneath its 50 & 200 DMA lines which recently converged and crossed over.  It faces a lot of resistance due to overhead supply now, which makes it unlikely to be a leader in the near term, even if it produces good earnings increases.  This stock was first featured on Monday, August 11, 2008 in the CANSLIM.net Mid Day Breakouts Report (read here). It followed up that appearance with a couple of big gains on heavy volume that helped it trade as much as +14.98% higher, but then it encountered heavy distributional action in the second half of August, during which time disciplined investors were prompted to walk away. Ongoing notes in CANSLIM.net reports (view all notes) identified technical sell signals that occurred as it fell into its prior base, violated its 50 DMA, then violated its 200 DMA.  Each sign of technical deterioration prompted investors to take defensive action if necessary, limiting losses while they were still small.  Successful investors learn to limit their losses!

Volume is a vital component of technical analysis.  Prudent investors that incorporate volume into their stock analysis have often benefited several fold. Ideally, healthy stocks will more often tend to rise on higher volume and pullback on lighter volume.  Volume is a great proxy for institutional sponsorship.  Conversely, high volume declines can be ominous, as this usually signals distribution and further price deterioration are more likely to follow.

Industrial Services Of America (IDSA -$0.09 or -0.66% to $13.50) triggered a technical buy signal shortly after it was first featured on Monday, August 11, 2008 in the CANSLIM.net Mid Day Breakouts Report (read here).  Its gains on 8/15/08 and 8/19/08 were backed by above average volume, giving a nice reassurance to investors that it was attracting institutional buying demand (the I criteria). However, shortly thereafter the stock negated its breakout and fell back into is prior base with losses on above average volume. Disciplined investors who may have bought were likely forced to make a quick exit, employing the sell rules whenever any stock falls more than 7-8% from their buy point. It initially found support above its 50-day moving average line, a level where institutional owners often step in and buy more shares, supporting a stock which they believe has a healthy outlook. But losses on 9/02/08 and 9/03/08 led to more serious technical damage, plunging below its 50 DMA line, triggering a technical sell signal.  It has been approaching an earlier resistance level in the $13.25 area that may act as near-term support. The stock would need to repair its 50 DMA breach for its outlook to improve.

View all notes | Alert me of new notes | CANSLIM.net Company Profile