Fitz Bits: Next Time, Stay Calm

OK, let's look at some charts. Costco (COST) Gogo (GOGO) Omnivision Technologies (OVTI) Lululemon (LULU) One of the most challenging aspects of trading is the most obvious one -- timing. It's easy to say, Buy low, sell high. But it's much more difficult when you try to impose that simple logic on your trading behavior. We get wrapped up in rallies and in the fear that we are missing out. As a result, we buy stocks that have run too far, only to see them pull back shortly after we have committed our hard-earned capital. Or we might sell our beloved stocks when they appear to be going to zero, only to see the stocks rally about 10 minutes after we've dumped them. Over the years I've made more than my share of my mistakes, refining the worst of the more common errors and inventing a few of my own for good measure. But the common thread running through all of them has been the failure to consider what everyone else is doing -- and what most have already done. When a stock is extended far above key moving averages, this is due to persistently aggressive buying. Well, there is only so much of that kind of power -- and, once it starts waning, the stock will settle down and recover the moving average. Similarly, when a stock has sold off to an extreme level that's below key moving averages (such as the 50-day or the 200-day line), the reason is always the same: excessive dumping of the stock as shareholders rush to exchange that stock for cash. Well, there will only be only so many of those folks before their selling gives way to accumulation by traders who are always looking for deals. So the next time you get too panicked when a stock is excessively sold off, or too excited when a stock is overbought, remember that prices are dictated by the actions of traders. They aren't magic. They aren't random. They are indications of human decision-making. Here are some charts that reflect these concepts. This daily chart shows Costco on the right side of a big bowl pattern. The stock printed a high last November and then rolled over, falling from $125 down to $110 in the matter of a couple of months. Since then, the stock has been climbing back to test the November high. Last week the shares ramped up on strong same-store sales numbers before they consolidated in a tight flag pattern. Any breakout from this level would be a buy signal -- but how much upside potential is there from these extended levels? I'd suggest sitting back and waiting for weakness before buying. The stock is too far above the 50-day moving average to provide much upside potential. Give it some room, and you'll probably get a better entry. This daily chart of Gogo shows a high-volume breakout from a very obvious downtrend. The stock printed a major low in May on a high-volume selloff. Since that time, the stock has been consolidating at higher levels between $15 and $17. So this breakout to above $18 puts the stock in the buy zone. I'd be a buyer right now, and then look to add to that position on a move above the 200-day moving average. This daily chart of Omnivision Technologies looks like a side view of a staircase. Each breakout is followed by sideways consolidation that allows the 50-day moving average to catch up to the higher price level. As with Costco, this might become an enticing stock to buy if the bulls push it out of the current consolidation. But here's the problem: A breakout just pushes the stock to a point at which further upside is limited. So just be patient and wait. You're likely to get a chance to buy at lower levels sometime in the next few weeks. Yesterday Lululemon released its quarterly earnings numbers, and they were a bit higher than expected. The company was so giddy that it raised its annual earnings forecast. This was a bit of a surprise to the bears. The stock gapped up and closed nearly 14% higher than Wednesday's close. I like Lululemon clothes, but that's the extent of my commitment at this point. I do believe that Thursday's power move is a game changer. It's no longer profitable to be short the stock. But I think there is a lot of work to be done before it'll be right to own the stock. Wait for a base to form. That'll take a while. Be careful out there.

Fitz Bits: Next Time, Stay Calm

Remember that prices are dictated by nothing more than traders' actions -- by human decision-making.

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