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TRADING SYSTEMS


A New Setup For Novellus, But Will It Follow Through?

12/19/11 11:21:39 AM
by Donald W. Pendergast, Jr.

Shares of Novellus broke sharply higher late in the week. Will this new long trade setup trigger soon?

Security:   NVLS
Position:   Buy

While it's always exciting to witness a big-name stock leap higher and break free from a large consolidation pattern, serious traders will always want to ask themselves some tough questions (and get honest answers) before actually committing themselves to any new trading opportunity. Here's a look at the daily graph for Novellus (NVLS) and a brief overview of its current trade setup (Figure 1).

FIGURE 1: NVLS, DAILY. On November 7, 2011, HMSY surged higher before it was announced that it was also to be added to the S&P Midcap 400. The stock has traveled too high to chase another entry but if it consolidates in price and the general market turns higher, it could offer a second buy point.
Graphic provided by: MetaStock.
Graphic provided by: RMO system indicators from MetaStock 11.
 
Novellus sold off fairly hard in July and early August, just as many other big, mid and small caps did; the ever-present threat of a eurozone default did little to give the broad market encouragement to make a major low in early August 2011, but for some reason, that's what happened.

For many stocks (NVLS included), the following six to eight weeks were characterized by lots of aimless, meandering and meaningless moves -- a little bit up, then a quick reversal, a minor downswing, then perhaps another turn back up into relatively calm equilibrium. Then came the October 4, 2011 swing low, a floor in the market landscape that helped launch NVLS and hundreds more big-cap stocks higher for the better part of two months, despite a few pullbacks and/or consolidations along the way.

Currently, NVLS is in strong technical shape, what with the very powerful breakout and RMO (Rahul Mohindar) system swing buy signal of Thursday, December 15, 2011, clearly evident on the chart. I typically use a Chaikin money flow indicator on most charts, but for this one I decided to see what the negative volume index (NVI) and positive volume index (PVI) were up to instead; the NVI attempts to decipher what price action does on days when volume is lower than the previous trading session, while the PVI's job is to help traders determine price action trends on days when volume is above average.

In this chart, we see that prices have tended to decline on days of lower (negative) volume even as they have also tended to rise on days of increasing (positive) volume. The PVI and NVI are a terrific pair of indicators to use, especially if you want to confirm that a price trend is especially strong or week; to use the indicators in this way is quite easy -- all you need to confirm is that both indicators are strongly trending together in the same direction, higher for a bullish trend and lower for a bearish trend.

We don't see that on this chart -- yet -- as the recent consolidation made sure of, but if we see the NVI also start to trend up (meaning that prices are generally rising on days of negative volume) along with the PVI, then this could be a great confidence-builder for those who like to buy minor pullbacks in a strongly trending market. For now, traders still need to ask themselves a few questions before jumping on this long RMO swing buy setup.

The first question is:

1. Can I limit my risk to no more than 1% of my account worth on this breakout buy setup?

2. Am I more comfortable buying into strength if Thursday's high price is exceeded, or am I more at ease by simply waiting for a minor intraday pullback, looking for a better entry price?

3. Am I going to set an initial stop-loss and price target for the trade at initiation, or am I going to run a trailing stop and/or scale out of my position if the trade moves in my desired direction?

4. Is my account adequately funded so I can slowly begin to diversify my portfolio across market industry groups or sectors?

Those are but a few of the questions you need to be asking yourself every time you consider putting on a trade in the market. Of course, you may need to adapt/modify or alter the type of questions to better fit your own unique trading enterprise, and if that's the case, go for it.

The big idea here is to keep asking yourself questions that will help you begin to keep your account out of the danger zone and well within the profit zone, despite a few setbacks every now and then.





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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