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MOMENTUM


Ameritrade 1999: A Hot Tip Proved Out

04/14/09 09:18:06 AM
by Donald W. Pendergast, Jr.

Sometimes, it really does pay to watch the various shows on the financial news channels. Here's a play-by-play of a hot stock tip that actually had technical merits.

Security:   AMTD
Position:   N/A

During the afternoon of December 25, 1998, CNBC had on a guest, one who mentioned that although Ameritrade (AMTD) shares were, in his opinion, a "long shot," the fact that the company had a rapidly growing client base of online traders could easily justify a modest allocation of capital to the company's stock. At the time, shares were going for about $25 (actual price then or $4.88 today, adjusted for splits) and had recently broken out of a flat base on heavy volume. I decided to put the stock on my watchlist and see how it performed over the next few weeks before putting any money into it. I went to work later that night in New Jersey and didn't look at a chart or quote for AMTD for more than two weeks.

The fact that I also had an account at Ameritrade seemed more than coincidental, and I began to get a gut feel that AMTD was about to become one of the biggies of the recent NASDAQ rally, a hot market move that was eventually destined to carry into February 1999.

FIGURE 1: AMERITRADE, DAILY. 1999 — like a relic from a different age or not? Time-tested patterns like flat-base breakouts, channel breakouts, and support/resistance levels will likely be part of the technical trading landscape for as long as freely traded markets exist.
Graphic provided by: MetaStock.
 
On January 20, 1999, with a thoroughly read copy of Investor's Business Daily in hand, I dialed my friendly Ameritrade broker, having decided to take the plunge on AMTD shares. He was delighted that I wanted to buy 46 shares at $58.125, and had my order filled in a minute or so. The commission was $18. I didn't place a stop-loss, deciding to keep a mental stop near $40; after all, this online broker's shares had more than doubled in three weeks, they were opening new accounts like crazy, and I didn't want to let any random "back and fill" price action take me out of what I felt was going to be a sure winner.

Looking at the daily chart for AMTD (Figure 1), you can see just how appealing this stock looked at the time, especially given the ever-growing NASDAQ/tech stock mania that was just starting to grip the conscience of millions of traders and investors. By Christmas 1998 the stock had just made a spectacular bullish breakout from a long, flat base on six times the average daily volume, a sure sign that some big money somewhere had finally decided to tip its hand. So the hot tip from the CNBC analyst actually did have some merit, and the charts prove it.

By the time I made that first buy on AMTD, the stock had already completed another base (or platform), followed by yet another massive breakout move higher. Clearly, choosing to put half an order on at $58-1/8 was a good move, based on the chart patterns and market momentum. Finally, another breakout from a prior high gave me the second entry signal I'd been looking for, allowing another 40 shares to be acquired at $63.875 on January 28, 1999. The stop-loss was now moved up to $44, near the swing low of January 22, 1999.

All I needed now was for that NASDAQ rally magic to keep going for a while, hoping to snag some nice profits on this momentum star.

The rally obliged, and since I had just embarked on vacation for two weeks, I had some extra time to monitor my AMTD and James Dines stock positions. Changing planes in Albuquerque, NM, on January 29, 1999, I called my broker and he said AMTD closed at $80 and that I should just enjoy the weekend. I moved the mental stop to breakeven and did just that.

On Monday, February 1, 1999, the NASDAQ just kept going up and along went AMTD with it. It was like living in a dream!

I glanced at a chart and felt that I should trail the stock much more closely now, bringing the stop up to $75, virtually guaranteeing a profit no matter what happened. On Tuesday, it was more of the same, but as soon as the stock cleared $107, I decided enough was enough; the move might be due for a pullback. I waited a couple of hours and then asked the broker to close out the whole deal, getting out of all 86 shares at $99.25. Not too bad, a 61.78% gain in about two weeks. Of course, I lamented having sold too soon as AMTD actually moved up to almost $121 two days later, but then as I witnessed the massive selloff that ensued (the stock losing half its value in five trading sessions), I realized that I had done the right thing.

Side note: Today, it's easy to complain if our datafeed goes down for a few minutes or if a fill on a trade was worse than expected. But in early 1999, that AMTD round-trip commission cost a whopping $54! That's $51 more than I would have to pay to complete the same trade today, only 10 years later. Sometimes, the words of singer Carly Simon really ring true: these are the good old days, right here, right now.


In 1999, not too many traders and investors were as technically savvy as they are today, but it's amazing how simple chart and volume patterns like these continue to work. It worked for me in 1999; without having real-time charts, a computer, a cell phone or even $1 stock commissions at my disposal, I was able to use a series of very basic flat-base breakout, support test and subsequent breakout patterns to help craft a winning trade that I will never forget.

Of course, the underlying momentum of the NASDAQ Composite Index also played a major part in the success of this trade, and that's another reason why traders should always try to position themselves in the market groups and sectors exhibiting the highest amounts of relative strength and momentum.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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Date: 04/15/09Rank: 5Comment: 
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