Market Talk with Piranha is currently moving to its new home at chrisperruna.com. The new site is up and running but many of the posts need editing as the images and stock charts did not transfer successfully (thanks blogger). I will post all new entries to both blogs – Thank you for your patience while I make this change!

Wednesday, February 02, 2005

Can I buy in the Base?

A great question was asked through e-mail by one of our fellow members:
Why wouldn’t you purchase ELOS now before the right side of the base is finished forming?

A stock must finish the base before it is bought because most stocks that don’t finish the base continue to trade sideways for months or years or start to breakdown as the speculators bail by selling their positions. The line of least resistance or the pivot point is the best place to buy as the stock is breaking out to new highs. Remember, many people bought ELOS at the top of the left side of the base near $39.

These investors have suffered through paper losses waiting months to sell at break even which would be at or near the top of the right side. When the price nears the old high, most weak holders will sell out happy that they broke even. This selling action usually occurs in a week’s time thus forming the handle and shaking out weak investors on lower volume.

After the institutions see that these weak holders have sold, the real party starts with a breakout on above average volume – the pivot point. Once the stock breaks out and goes on to a new high, there are no more sellers because the stock has never been in this territory. There is no resistance above this pivot point.

This is why we wait to allow the stock to prove itself and buy properly at the pivot point. ELOS may never complete the base but if it does, I will post the precise pivot point and volume levels needed to qualify.

Finally, if you buy ELOS now, it would be pure speculation and your risk levels would be raised based on history. I would prefer to buy higher when there is lower risk of a breakdown because stock holders might want to sell old positions from the left side of the base. In addition, the current market is in correction mode giving us more reason to wait for this base to form properly, keeping our risk lower than it is today.

This was an excellent question and I hope many of you learn and study past breakouts to understand this rule better.
Piranha

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