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After a stock breaks out, it is imperative to continue monitoring its daily and weekly price and volume patterns for any possible ailments that may develop. Every so often, there are a few ominous technical signals that emerge. Prudent investors have learned to identify them due to the fact that they tend to lead to lower prices. One of these disconcerting technical signals is called a negative reversal.
A negative reversal occurs when a stock opens up the session heading higher but then reverses and ultimately closes lower. Reversals are often considered more severe if the stock's initial gains lift it to a new high, but it then reverses and closes for a loss on heavier than average volume and ends near the session's utmost lows. Negative reversals can occur on a daily, weekly and monthly chart. In general, the longer the time frame involved, the more concern is prompted by the severity of the reversal. Volume is directly correlated with the severity as well.
Ultra Clean Holdings Inc. (UCTT -$0.39 or -2.24% to $17.05) negatively reversed after hitting a new all-time high on Friday, however the volume was lighter than average, easing some of the concerns attached to a negtive reversal day. This stock was first featured on Monday, January 8, 2007 in the CANSLIM.net Mid Day Breakouts Report (read here) with a $14.49 pivot point. UCTT rallied briefly, but the bears quickly showed up and sent this stock diving below its -7-8% sell rule. However, it made a respectable stand near its 50-day moving average (DMA) line, and after having repaired the technical damage UCTT appeared in the March '07 CANSLIM.net News (read here) with a new pivot point of $15.22. The newsletter's detailed write-up descibed how UCTT recently broke out of a "double bottom" type chart pattern, with the first low at $13.01 occurring on 1/26/07, then a lower low of $12.24 occurring on 2/13/07. It had cleared the center of the "W", which marks the pivot point of $15.22, as it gapped up for considerable gains on over four times average volume on Friday, February 23, 2007, triggering a fresh technical breakout. Normally, when a stock negatively reverses from a new high it is a sign that the bulls are exhausted and the bears have gained the upper hand. Locking in gains, and increasing cash, during market corrections can yield superior results.
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Group action plays a very important role, and experienced investors learn that they can increase their odds of picking a great winner by always focusing their buying efforts in the market's leading groups. The "L" criteria in CAN SLIM(TM) tells us to choose leading companies in leading industry groups, thus it is suggested that investors choose from the top quartile of the 197 Industry Groups (listed in the paper most days on page B4). 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.
Ultra Clean Holdings Inc. (UCTT +$1.22 or +7.66% to $14.71) broke out to new highs with considerable gain on more than twice its average daily trading volume, triggering a technical buy signal. This stock was first featured in today's CANSLIM.net Mid Day Breakouts Report (read here) with a $14.49 pivot point. This company sports a very healthy earnings per share (EPS) rating of 98 and a very healthy relative strength (RS) rating of 96. UCTT resides in the Electronics -Semiconductor Equipment group which is currently ranked 49th out of the 197 Industry Groups covered in the paper, placing it in the much preferred top quartile and satisfying the "L" criteria. It is an encouraging reassurance of leadership to see its relative strength line reach new highs as the price surged to new highs. It is important to be disciplined and not "chase" a stock above the pivot point by more than 5%, the "maximum buy" price. Now that it is clear of all overhead supply the path of least resistance is likely to lead it even higher, however if this stock rolls over and trades below its pivot point then today's bullish breakout action will be negated and lower prices may follow. As always, stocks should be sold if the price ever falls 7-8% below your purchase price, as that is the "max loss" guideline for properly protecting your capital.
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