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Patience And All-Time Highs

07/20/11 08:54:09 AM
by Billy Williams

In this market, in order to profit, traders and investors need to rely on two weapons: patience and all-time price highs.

Security:   AAPL, CLB, BIDU
Position:   Buy

In the stock market, traders and investors can count on very little except that just when the market looks like it might get better, then it's almost a foregone conclusion that it will get worse. While July may be the best-performing month of the summer season, the summer as a whole looks like it's going to get worse, especially after the Standard & Poor's 500's downward spiral in recent weeks, judging from the last few days of bearish price action.

For option traders, who have been using spread positions to lock up premium and generate easy income, the market's price action barely registers on their anxiety scale, but for stock traders, there is an ever-increasing wall of worry to climb as price falls and anxieties rise at the market's future prospects. Obviously, with troubling job numbers in the US, the Greek debt crisis is just a bomb waiting to go off, and a game of "Who blinks first" over the US budget between political factions leaves the market to compete in an arena of the unknown, which is the least-productive battle ground that traders and investors alike want to make a stand in.

Then there's a stock like Apple Inc. (AAPL), which just posted a new all-time high, maintaining its position as a stock leader, even in a weak market. See Figure 1.

FIGURE 1: AAPL. AAPL broke new ground as it traded to a new all-time high on strong volume, maintaining its position as a stock leader even in a weak market.
Graphic provided by:
Like any good soldier will tell you, if you want to win a battle, then you have to know which ones to fight. Now, in today's market environment, you must know which battles to fight and, more important, that the real battle to win is the one within you in the context of being patient like a sniper who waits for days or weeks, remaining absolutely still until his enemy is perfectly within his sights, and only requires a simple two pounds of trigger pull to finish off his target.

Professional speculation is a game that requires tremendous patience and detachment. When you know the opportunity is ripe for the picking, then and only then do you act. As Warren Buffett once remarked, "I only invest when it is so obvious that it is like seeing money on the floor and all I have to do it pick it up."

FIGURE 2: CLB. CLB has been one of those quiet stocks that has phenomenal fundamentals and marches ever upward, making new highs time and time again.
Graphic provided by:
To accomplish a similar objective in this market, there is one simple pattern that can help you achieve your goal, which should be to pick the absolutely best stock to trade or invest in once the market begins to turn back up: find the strongest stocks trading at or near their all-time highs. Figure 2 shows CLB, a quiet stock with phenomenal fundamentals and marches ever upward, making new highs time and time again.

Stocks trading at these price levels have been proven to lead the market higher and/or achieve outsized gains, in part because they have no overhead resistance that could cause a price reversal, but also because investors who observe the upward trajectory are likely to use momentary pullbacks as buying opportunities but that's also true of trend traders, all of which pushes the stock higher and higher.

In the current market, there is tremendous weakness, and there does not appear to be any type of news or fundamental improvement at present to cause the market to turn back up. That, and the fact that the summer seasonal pattern in effect is compounding the inherent weakness as well.

This fact is your new battleground and your patience is your weapon to outlast it because, eventually, it will change.

In addition, surveying this battleground for choice targets -- strong stocks trading at or near their all-time high -- will be your key to fulfilling your performance objectives.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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