JS-Masterclass #7: Confirmations & Violations
In previous tutorials, we have covered the stock selection process and the identification of low risk, high probability entry point following constructive consolidation patterns.
Now that we are in the trade, the question comes up what to look for. What makes the price action healthy so that you rather stay in the trade and what are the alarm signals to look for?
The Founder of the Berger Funds and Stock Market Legend Bill Berger said:
“I buy tennis balls and sell eggs.”
What does that mean?
‘Tennis-Balls’ are characterized as follows: after a breakout under high volume out of a constructive consolidation pattern, most stock will pull back after a couple of days. This pullback for ‘Tennis-Balls’ normally happens under low volume and is followed by a strong price increase under heavy volume. Just like a tennis ball immediately pooping back after a drop to the ground.
‘Eggs’ are characterized as follows: The above mentioned pullback after a breakout happens under high volume and the stock is not able to recover from this pullback. Just like an egg which drops down to the ground.
What you do want to see after you have entered a trade:
• The trade is immediately profitable
• Good volume characteristics (high volume on up-days and low volume on down days)
• High volume rallies – low volume pullbacks
• Follow through buying (2-3 days or more) – institutional vs. retail
• More up days than down days
• More good closes than bad closes
• Look for ‘Tennis Ball Action’ after a ‘Natural Reaction’. A ‘Natural Reaction’ can be considered as a pullback under low volume following a breakout.
What you do not want to see after you have entered a trade:
• Squat directly after breakout
• Low volume out of a base - high volume back in
• 3 or 4 lower lows w/o supportive action
• More down days than up days
• More bad closes than good closes
• A close below the 20d MA on high volume
• A close below the 50d MA on high volume
• Full retracement of a good size gain
• Wide and volatile price action
• Outside day: high is higher than high of the previous day but closes below the low if the previous day. This happens on higher volume versus the previous day
In previous tutorials, we have covered the stock selection process and the identification of low risk, high probability entry point following constructive consolidation patterns.
Now that we are in the trade, the question comes up what to look for. What makes the price action healthy so that you rather stay in the trade and what are the alarm signals to look for?
The Founder of the Berger Funds and Stock Market Legend Bill Berger said:
“I buy tennis balls and sell eggs.”
What does that mean?
‘Tennis-Balls’ are characterized as follows: after a breakout under high volume out of a constructive consolidation pattern, most stock will pull back after a couple of days. This pullback for ‘Tennis-Balls’ normally happens under low volume and is followed by a strong price increase under heavy volume. Just like a tennis ball immediately pooping back after a drop to the ground.
‘Eggs’ are characterized as follows: The above mentioned pullback after a breakout happens under high volume and the stock is not able to recover from this pullback. Just like an egg which drops down to the ground.
What you do want to see after you have entered a trade:
• The trade is immediately profitable
• Good volume characteristics (high volume on up-days and low volume on down days)
• High volume rallies – low volume pullbacks
• Follow through buying (2-3 days or more) – institutional vs. retail
• More up days than down days
• More good closes than bad closes
• Look for ‘Tennis Ball Action’ after a ‘Natural Reaction’. A ‘Natural Reaction’ can be considered as a pullback under low volume following a breakout.
What you do not want to see after you have entered a trade:
• Squat directly after breakout
• Low volume out of a base - high volume back in
• 3 or 4 lower lows w/o supportive action
• More down days than up days
• More bad closes than good closes
• A close below the 20d MA on high volume
• A close below the 50d MA on high volume
• Full retracement of a good size gain
• Wide and volatile price action
• Outside day: high is higher than high of the previous day but closes below the low if the previous day. This happens on higher volume versus the previous day
Combing the BEST of two WORLD's: Cathie Wood & Mark Minervini
