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Wednesday, February 01, 2006

Let the Base Breakout before Buying

RightNow Technologies Inc. (RNOW) was removed from the MSW Index yesterday before it ever had a chance to make a move out of the cup with handle base it was forming. Earnings were up for Q4 but future expectations were lower than analysts expected, making this stock fall more than 20% in the first two days of trading this week. Any stock that falls 10% or more from the original coverage price is automatically removed to protect from further losses – no questions asked.

We have a rule on our Philosophy and Education page on our main site that states:

“We do not buy until the stock triggers the pivot point on above average volume also known as qualifying volume. This is the area where the stock faces the least amount of resistance as all overhead sellers are gone as we break into new high territory. The pivot point usually comes within 5% to 15% of the stock’s old high. Try not to buy a stock after it is 5% above the proper pivot point. This does not mean that we can’t buy on normal corrections and pullbacks as the stock remains in an uptrend. The rule only applies to the pivot point area as the stock becomes extended.”

RightNow (RNOW) didn’t breakout from the cup with handle base so you should have never bought the stock. Our analysis from week to week is listed below. To see a beautiful “successful” cup with handle breakout, study the chart located on our Technical Analysis page for Domino’s Pizza.

On our Technical Analysis page, we define a cup with handle pattern as follows:

"Look for relatively quiet volume as the stock builds the left side of the cup. Volume at the base of the cup should be slightly higher than the left side as support is coming into the stock. The right side of the base should have above average volume with more up-days than down days. The handle will be the last part of the formation and should slope slightly downward with lower volume than the right side of the base. Our pivot point will be slightly higher than the highest point of the right side of the base. All breakouts should occur on volume 100% greater than average daily volume."

RightNow Technologies (RNOW) fell 14.99% yesterday (bringing the weekly drop to 20.30%). You should all know that any stock that violates a 10% loss (RNOW - 10% sell stop was set at $17.34) on the MSW Index is instantly removed from the index. Volume was up 1,095% versus the 50-d m.a. giving us the largest distribution day in the stock’s short life on Wall Street.

I will repeat a story that I posted on the daily screen last night from a member (for emphasis): The member e-mailed me about this stock (RNOW) since he had already established a position at an earlier date. He asked about the up-coming earnings release Monday and what he should do. I told him to follow his gut feeling or sell half of his position if he was worried and not sure (remember, the buy signal had not come since the pivot point was not reached on MSW).

He asked about short term capital gains taxes and I told him that the “gain” in the stock was more important. I am not sure what he did as he has not written since the earnings release. If he followed his gut, I would have to say he sold before the 15% drop today. I could tell in his words that he was worried. When you are worried about a position, get out (you can ALWAYS GET BACK IN).

RNOW history on MSW Index:

January 7, 2006
Coverage Initiated at $19.27 with support located at the 50-d m.a.
Comments: Has made past daily screens as the stock started to form the right side of a long 14 month base since the original IPO run-up. The buy zone is slightly below $21 and it dates back to late 2004. The target here is a run to $35 in the next 9 months.

January 21, 2006
Posted at $18.65
The handle continues to form with a breakout above $21. Support is located below at the 50-d m.a. ($18.13) Rating: Buy on strong move above $21

January 28, 2006
Support $18.13
Buy Zone: $21.00
A 7.24% gain this week as the stock is setup to breakout above the $21.00 buy point on the P&F chart. A triple top breakout will occur above $21. Volume should reach approximately 2 million shares on the breakout. Rating: Buy on strong move above $21

The stock never made the breakout so NO ONE should have bought the stock prematurely or you would be breaking rules. If you broke rules – you lost money in this trade. IT IS THAT SIMPLE!!! FOLLOW THE RULES!!!



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