I thought I’d start a new thread on stocks that have been sold off and are now in a period of consolidation (basing) and may be potential candidates to soon resurrect themselves.
There are 2 stocks that are currently clearly in a basing phase that I have on watch. They are GNC and CCL.
Where possible, I look to draw in a downtrend line down from one of the earliest highs. This I have been able to do for CCL. It is the breaking of this line that I look for, not to buy but to indicate that the downtrend, or at least the momentum of the downtrend may be over. Then I look for the basing phase to develop and the longer the basing period all the better. I then look to draw the trendline which is usually a horizontal resistance line establishing the price level which once exceeded marks the commencement of hopefully a new bull phase. The resistance line is fairly clear on the GNC chart, not so clear for CCL.
I am not necessarily looking to buy on any breakout as there could still be a period of choppiness before a good trend gets underway. I would only buy the breakout provided there is an underlying bullish pattern within the base or in the latter stages of the basing period. Alternately, a small micro consolidation just below the resistance level. The best buy is likely to occur with a consolidation pattern just above the breakout level.
The COH chart below, illustrates the points I have made above.
Shaping up nicely to move back up though we are barely past the downtrend line. The exact break out level is not clear but for me it’s $9.40 to $9.50. Based on the nice pattern of movement off the Oct lows you could buy any break that occurs now with a stop below the lows of this month at $9.10. I will play a little conservative by buying half a stake above $9.40 and the remainder, waiting for that consolidation pattern to hopefully develop above any breakout.
The resistance level is clear but with no underlying pattern to support this breakout off the Dec lows I will wait till one hopefully develops. As a general rule I don’t buy breakouts where there has been a good run up in price without rest. There has already been one false break and a small loss if a trade was taken. That would have been a trade according to my trading strategy. Sometimes a few goes at it are required.
Comments, further observations are welcome.