WHERE'S "THE LEADERSHIP"?

The market is in a new rally, but where are all of the breakouts?  That was the question many had at an Investors Business Daily meet-up I attended last week.  In fact, we spent over an hour going through chart after chart looking to assemble a watch list based on canslim principles.  And guess what?  We didn't find a single one!  

On top of that, an individual gave a report on the health of the market.  His findings were the market is rallying, has changed course from lower highs and lower lows to higher highs and higher lows and the number of stocks making new lows has declined.  Sounds great.  But what's missing?  Stocks making new highs.

Now why is that?  Canslim is a fantastic system for finding and buying stocks.  However, it's based on stocks that are consistently making new highs in a sustained bull market.  Well, when the market gives up 50% of its value in two months, it's going to take some time for us to return to a market where there are a lot of stocks making new highs. 

In addition, the few that have broken out from canslim patterns have quickly been hammered and those that are setting up to breakout appear to be the start of topping patterns.  I talked about the breakout failure of AXYS in last weekend's blog.  



Now let's take a look at a few others:



With THOR, this issue has very quickly repaired its damage.  We saw this with AXYS -- where it advanced 38% in a week prior to breaking out.  With THOR, you have a gain of more than 50% prior to the breakout.  It seems very risky to buy a stock that's made such a big move in a short period of time. The odds for a sharp pullback and a repeat of AXYS are very high.



AFAM is on the lists of everyone that's a canslim follower. That said, you can define this latest base as a late-stage base.  The other trouble here is that this looks like what we call a change in trend pattern.  This happens when a stock that's been in a prolonged uptrend, forms a double top (red lines) and then breaks its upward trendline (pink line).  AFAM may make another run into the low 50's, but we fear a breakout attempt from there could send it crashing below its trend line.



ISYS was shaping up nicely.  But their earnings report this week caused an implosion.

In this market, the few stocks that are at or near new highs are generally getting pounded.  This goes to show you William O'Neil is right -- "in a bear market, they eventually get them all."

So if there are very few breakouts to find and those that are breaking out aren't going anywhere, what can you do?

1. You can stay in all cash and wait for the market to become attractive to the canslim system.  We applaud those that make that decision.  There's nothing wrong with sticking with a system and waiting for a market that supports your system. However, this system requires a certain kind of market -- a kind of market we haven't seen in a while and probably won't for at least 6 months. 

It's going to take a lot of patience and discipline to do that as it will be several months before we start seeing an abundance of canslim set-ups.  When the market sells off 50%, it's going to take a lot of time for stocks to regroup and start recovering.
 
2. You can start focusing on where the action is right now and will be for some time and follow a proven system for taking advantage of and profiting from those opportunties.

Where is all the action now?  It's in the down to up change in trend patterns and the new uptrend pullback off highs pattern of stocks that were once big winners -- these are the stocks that were canslim breakout stocks, had big runs and have been way oversold.  These stocks are forming classic down to up change in trend patterns such as the reverse head and shoulders, a double bottom and our familiar First Thrust Up/Pullback Off Highs pattern like ABX which I've talked about in the past.



Last week, I had 8 stocks on my watch list from either First Thrust Up/Pullback Off Highs or Double Bottom patterns.  All 8 triggered at the open Monday.  I bought 6 of them and here's how our it turned out:

Stock Shares Buy Price Sell Price Profit %Gain KSU 200  $   19.41  $   20.45  $   208.00 5.4% UNP 200  $   48.39  $   47.89  $ (100.00) -1.0% ATI   200  $   22.58  $   25.16  $   516.00 11.4% ABB 300  $   12.45  $   13.36  $   273.00 7.3% MEE 300  $   12.80  $   14.66  $   558.00 14.5% AUY 1000  $    5.37  $    6.13  $   760.00 14.2%  $2,215.00

This is where the action is and will be for some time.  It's your choice, you can sit in cash and wait for the market and stocks to recover and THEN buy stocks that are making new highs or you can allocate a portion of your cash to buying stocks emerging from proven change in trend patterns and make considerable profits while the market recovers and a pro-canslim environment returns to the market.

My watch list for this week is full again of stocks that have set-ups like the six stocks I traded this week. For more information, sign up for my free newsletter at www.allabouttrends.net.