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I presume I'm not the only MarketSmith to get forced out of FRAN today following their 7-8% loss sell rule. With my rear-view glasses on, still licking my fresh wounds and asking where I went wrong, I offer the following thoughts.
I should have suspected the base-on-base pattern from the start and not selected this for my "Ready to MOVE!" list, rather keeping it on my universal watch list. I generally put stocks in my "Ready to MOVE!" list that I will buy without hesitation if the breakout looks sound (strong price and volume action). The first base looks sound enough with volume decreasing on the left side of the base and drying up at the bottom followed by strong volume increases on the right side of the first base. However, in the second base volume increased on the left side and decreased on the right making it a faulty base.
On the breakout day the stock rocketed 10.7% in volume 183% over average. I allowed my excitement to get the better of me ("Oh look at that...a stock that I picked on my list just broke out strong!!). I decided I needed a stake of that action to the tune of 25% of my portfolio. I pyramided in along the way with the first 50% stake up first, the next 30% when it increased 2%, and the final 20% at the next 2% increase.
My lesson learned: don't buy breakouts from faulty bases no matter how strong the breakout.
Sorry for your loss.
Perhaps there is another lesson here for you as well. I don't know what you are up YTD, but you may want to reconsider your existing sell rules or establish basic rules as to how you are going to handle a stock prior to earnings. Holding a 25% position into earnings in this market may have been a bit too ambitious.
So the depth of the base was 38%. Page 112 of HTMMIS says "The usual correction... varies from around 12% to 15% range to upwards of 33%". This sentence is a tough one. Why note the 12-15% range, if the depth can be upwards of 33%? The take away is to pay very close attention to the depth of the base. The deeper the base the greater potential for a hard hit.
I tend to avoid bases deeper than 30%, unless I can get a three weeks tight, four week square box (less than 15% correction over four weeks) or five week flat base to show up in the right side of the base.
Separately, I regard corrections deeper than the 12% handle described on page 116 should provide at least three weeks tight or four week square box or five weeks flat base, otherwise the breakout tends to be faulty. Note that FRAN had a 14.7% correction to the low on 8/2 with wide and loose trade over three weeks before breaking out.
A deeper handle is allowed if you arer in the last shakeout of a bear market. Pg 117.
Abe, I feel your pain!
I did not like the choppy and sloppy nature of this base, and it has run up a great deal, so I decided to give the stock some time... Thanks for sharing your lessons learned.