In recent weeks we have taken the opportunity to use this section to revisit some of the previously featured stocks that were dropped some time ago based on technical weakness. Studying what happened afterwards should hopefully allow investors to get a better understanding of the importance of having a sell discipline. Limiting losses while they are small is critically important to your success, and this investment system's rule is to always sell a losing stock after it falls more than 7-8% from your buy price. These well-known, high-profile companies serve now as perfect examples that will hopefully allow investors in the future to recognize the warning signs and technical sell signals so they will know when it is time to lock in profits or minimize losses per the investment system's sell rules.
Sun Hydraulics Corp (SNHY -$0.66 or -4.14% to $15.30) is not a currently featured stock, but it may be worth another look for any important lessons that can be learned from a previous market leader that has experienced a technical breakdown and fundamental deterioration. Those who might otherwise still be tempted to say, "But its a good company", and hold a losing stock after it falls more than 7-8% from their buy price have an opportunity to learn why limiting losses while they are small is so important. SNHY now faces a tremendous amount of resistance due to overhead supply, making the stock unlikely to be a market leader in the near term.
This stock encountered resistance near the upper limit of its trading channel - mentioned in the August 2008 Investing for the New Millennium article (read here). Then, its last appearance in the CANSLIM.net After Market Update's Featured Stock Update section was shortly thereafter, on 8/05/08, under the headline "Sun Falls After Giving Disappointing Guidance" with an annotated graph showing a violation of its 50-day moving average (DMA) line and details about prior coverage of this long-time leader (read here).
Sell signals prompted investors to unload SNHY shares long, long ago, and the stock has actually fallen an amazing -64.89% since 9/02/08 when it was dropped from the Featured Stocks list. The quarterly report for the period ended September 30, 2008 showed decelerating sales growth and earnings increases below the +25% guideline. It was no surprise (because the company gave guidance) in this case; but like we have often seen, fundamental deterioration followed an earlier technical sell signal.
SNHY is an example of a previously featured stock that eventually returned after being dropped from the Featured Stocks list. It appeared in yellow in the May 12, 2008 CANSLIM.net Mid-Day Breakouts Report (read here) with a new $36.60 pivot point and a $38.43 maximum buy price - and with more extensive coverage in that evening's CANSLIM.net After Market Update in the Featured Stock Update section (read here). SNHY was first featured on Friday, May 27, 2005 in the CANSLIM.net Mid Day Breakouts Report (read here), but subsequently dropped from the Featured Stocks list due to weakness.C A N S L I M | StockTalk | News | Chart | SEC | Zacks Reports |
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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.
Sun Hydraulics Inc. (SNHY -$4.32 or -14.50% to $34.12) sliced below its 50 DMA line with a considerable loss on very heavy volume today after its latest earnings report's accompanying guidance clearly disappointed investors. This stock encountered resistance near the upper limit of its trading channel - mentioned in the August 2008 Investing for the New Millennium article (read here). The weak action serves as a reminder for all investors to stay especially watchful near earnings announcements and disciplined by always limiting losses per the 7-8% sell rule, never holding a stock if it falls more than that much from your purchase price. Fundamental news often has an immediate impact. It was then noted on 8/04/08 when falling back into its prior base and near its 50 DMA line, raising concerns. Recently it had appeared in yellow in the Wednesday July 30, 2008 Mid Day Breakotus Report (read here) with an updated $41.59 pivot point and a $43.67 maximum buy price and the following note: "Y - Gain today with above average volume for a new all-time high. Its color code is changed to yellow with new pivot point and max buy levels noted. High-ranked company in the Machinery - Gen Industrial group with strong quarterly and annual earnings increases (good C & A criteria). It has rebounded impressively since weak technical action prompted its removal from the Featured Stocks list on 6/27/08. Featured in yellow in the 5/12/08 CANSLIM.net Mid-Day BreakOuts Report (read here). See the Featured Stock Update section of the 5/12/08 CANSLIM.net After Market Update for detailed analysis and an annotated graph (read here)." The stock negated its latest breakout and has steadily fallen over the past few sessions.
The company increased its earnings in the latest quarter by +50% while sales jumped +19% versus the same period in the previous year. the company still sports strong ranks; an Earnings Per Share (EPS) rating of 95, and a Relative Strength (RS) rating of 96. More serious concerns would be raised by further weakness leading to a close under its recent chart lows near the $31 area and its 200 DMA line. SNHY was first featured on Friday, May 27, 2005 in the CANSLIM.net Mid Day Breakouts Report (read here) with a split adjusted $15.24 pivot point and a $16 maximum buy price. Initially, the stock rallied nearly +50% before encountering some resistance and then pulling back and triggering technical sell signals. The stock spent the next 2 years building a new base before breaking out again in May 2007.
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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.
Sun Hydraulics Inc. (SNHY +$2.63 or +7.10% to $39.68), surged to a new record high today with a considerable gain on two times average volume. The healthy action, indicative of institutional buying demand (the I criteria), helped this high-ranked leader appear in yellow in the CANSLIM.net MidDay Breakouts Report (read here) with a new $36.60 pivot point and a $38.43 maximum buy price and the following note: "Y - High-ranked company in the Machinery - Gen Industrial group reaching new all-time highs today. Showed strong quarterly earnings increases. Patience may allow disciplined investors to accumulate shares on light volume pullbacks toward prior chart highs. Technically broke out on 5/06/08 from an orderly flat base as well, and now it is a bit extended from that earlier base." The company increased its earnings in the latest quarter by +30% while sales jumped +20% versus the same period in the previous year. SNHY sports strong ranks; an Earnings Per Share (EPS) rating of 95, and a Relative Strength (RS) rating of 98. The number of top-rated funds owning an interest rose from 30 in Jun '07 to 53 in Mar '08, which shows increasing institutional demand (the I criteria). Concerns would be raised by any weakness leading to a close under its old chart highs near $36.50 area which would have the effect of technically negating its latest breakout. Always limit losses per the 7-8% sell rule, and never hold a stock if it falls more than that from your purchase price.
This stock was first featured on Friday, May 27, 2005 in the CANSLIM.net Mid Day Breakouts Report (read here) with a split adjusted $15.24 pivot point and a $16 maximum buy price. Initially, the stock rallied nearly +50% before encountering some resistance and then pulling back and triggering technical sell signals. The stock spent the next 2 years building a new base before breaking out again in May 2007. A few months later, the stock topped out in July 2007 and began building its latest 10-month base. Last week it cleared an orderly flat base with big volume gains on May 6, 2008 which alllowed it to challenge prior chart highs in the $36-38 area.
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