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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 (DMA) line or 200-DMA line. Violations of those 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.
LAM Research Corp. (LRCX -2.16 or -4.04% to $51.29) fell considerably after gapping down 51 cents lower that the prior close at the open today. Gaps are normally a sign of institutional pressure, so the gap down alone is a negative indication. Concern is raised because it also closed below its 50 DMA line ($51.70), although the loss came on only about average volume. Technically, further declines and deterioration leading to a close under its December 1st intra-day low of $50.55 would would be considered a sell signal. LRCX was first featured at $52.81 in the 11/13/06 CANSLIM.net Mid-Day BreakOuts Report with a DailyGraph (read here) as it was breaking out of a big cup-with-handle pattern and triggering a technical buy signal. However, after making a brief run into new high territory (trading as high as $57.05 on 11/20/06) it has since fallen back under its May chart highs and dropped back into its prior base. Only a prompt repair of the 50 DMA breach would improve the stock's outlook, meanwhile disciplined investors should, as always, stand ready to limit losses any time a stock falls 7% from their buy point.
LRCX was also covered in more detail in the 12/04/06 CANSLIM.net After Market Update with a DailyGraph(R) here as it fought back with gains on heavy volume after nearly testing its 50 DMA line. The detailed analysis that day included the cautionary remarks that "any deterioration under the recent chart lows or breach of the 50 DMA line would be considered technical sell signals, especially if volume swells behind any damaging losses."
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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.
LAM Research Corp. (LRCX +2.19 or +3.91% to $53.78) bounced nicely, finding support above its 50 DMA line. The stock was first featured on Monday, November 13, 2006 in the CANSLIM.net Mid Day Breakouts Report (read here) with a $52.53 pivot point. It spent the next few days advancing before reaching a near term high of $57.05 on November 20, 2006. When it recently began pulling back, concerns were raised as losses were accompanied by above average volume. Technically, last Friday's close ($51.59) under a recent high close ($52.08 on 10/16/06) also raised some concerns because it had fully negated the bullish action which had come on November 13th and 14th. However, some reassurance was offered by the fact that it ended that session well above its intra-day low and it still stayed well above its 50 DMA line.
Shortly after today's opening bell, the bulls returned and spent the rest of the session bidding LRCX higher. It was impressive to see heavier volume on the gains than there was behind the three previous losses. Now that support was found above its 50 DMA, the stage is set for further gains. However, any deterioration under the recent chart lows or breach of the 50 DMA line would be considered technical sell signals, especially if volume swells behind any damaging losses.
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It is very important to isolate the noise and pay attention to price and volume as we make our way through yet another earnings season. There are a slew of analysts that come out and set "targets" and who constantly engage in publishing upgrades or downgrades on various securities. An important element in profitably navigating through a busy earnings season is to see how your individual holdings react to their latest earnings news and guidance. While it is a common occurrence to see stocks sell off after a new earnings report, it is healthy to see investors promptly bid the stocks higher after a company reports their quarterly results. Investors that objectively analyze price and volume will likely do better than blindly following a plethora of analysts' upgrades and downgrades.
LAM Research Corp. (LRCX $3.15 or 5.59% to $53.25) exploded out of a massive cup-with-handle pattern on Monday. This stock was first featured today, November 13, 2006 in the CANSLIM.net Mid Day Breakouts Report (read here) with a $52.53 pivot point. The company sports a very healthy 99 Earnings Per Share (EPS) rating and an acceptable 80 Relative Strength (RS) rating. The company tripled its third quarter results, earning $1.13 a share vs. $0.35 a share in the same period last year. This is a stunning +223% increase and the stock has been rewarded accordingly. LRCX has also managed to increase its annual earnings at a healthy clip, satisfying the "A" criteria. Volume jumped above average, coming in near the minimum +150% requirement that is a signal of solid institutional participation.
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