Make it a Blockbuster 2001 ... So Far

04/12/01 02:37:03 PM

by David Penn

Shares of Blockbuster have almost doubled since the beginning of the year. Will the trend stay friendly?

Security: BBI
Position: N/A

Traders are often cautioned against going long too late during a V-shaped rally. The reasons are not too difficult to understand: stocks tend to move downward in a manner both sharper and faster than they tend to move upward. As such, while there can be quick profits for those who are savvy (or simply fortunate) enough to buy at the trough bottom of the decline, those who enter after the rally has already established a fairly sharp V-shape are often the ones who end up bailing out when the rally inevitably corrects.

Still the allure of a dedicated uptrend--no matter how precarious and apparently unsustainable the advance may be (think of the Nasdaq in the fall of 1999)--is enough to mesmerize many. And with axioms like "the trend is your friend", there is a not-so-subtle encouragement to believe in continued advances--however steep, however improbable. But considering a proper entry point before climbing onto that soaring stock may help squeeze profits out of a situation that might soon run its course.

Buying at the low points of an upward trend is among the more profitable ways to exploit rising prices, especially if the bottom is missed.

Graphic provided by: MetaStock.

Blockbuster (BBI) shares were in a major decline before they hit bottom late in December 1999. From a low of about $8, BBI rallied in January and, except for a 14% correction in March, they have hardly looked back. At present, BBI is trading around $16 per share. As the chart shows, the uptrend for BBI is well established from January 2001 into April, and the price movement is quite energetic. When the trendline is drawn to include the March low, it appears that BBI was skimming across its uptrend like a smooth stone over a pond surface, with the March correction serving almost as a spring to launch Blockbuster into 52-week high territory.

Corrections during uptrends (such as the March correction shown) are one of the best ways to take advantage of sharply moving stocks such as this one--especially if you arrive too late to the scene to buy the bottom. When a dedicated uptrend is established, waiting until the security corrects to the upward trendline before entering a long position can help capture a series of gains as the up trending security advances and declines again and again until the trend changes.

There are a variety of methods to determine when to enter the long position. One suggests waiting until price action rebounds off the up trendline. Another way of expressing this idea is to buy into the first rally day in which prices trade above the high of the last decline day leading down toward the trendline. For example, when Blockbuster tested its up trendline in March (the decline day), a trader might go long on the following day as soon as prices advanced above the high of the decline day. Downside penetration of the up trendline would have been a signal that the trend (which, in the case of BBI, we have already suggested may be excessively sharp) might be about to change.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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Make it a Blockbuster 2001 ... So Far

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