Q: At what point would a stock be considered too far "extended" within its overall price movement to buy off a pocket pivot after it is recommended? O'Neil always seemed to indicate not chasing a stock beyond 5% or so above a breakout point, but your method doesn't seem terribly concerned with that principle. And what if Market Direction Model is on a sell?
A: First, we would like to remind everyone that we don't make "recommendations." We simply identified a buy point, which is a technically definable event. Obviously this is a sign of strength in a weak market, but it doesn't mean you should run out and buy it solely on that basis - it does, however, indicate that one should keep an eye on the particular stock in question, possibly initiate a small position, or buy a full position should the market find its feet and issue a new follow-through day or a buy signal on the MDM. That said, the quantitative easing environment has distorted market averages and thus your key guide should be our Focus List we send out each weekend. This includes all the stocks we find potentially actionable, thus should b e monitored for initial or subsequent entry points.
The alerts we provide on technical events such as pocket pivots and buyable gap-ups are useful depending on the context of the general market. If we are in a bull phase, then they could likely be acted upon on the long side, if we are in a bear phase then we are simply identifying a stock that should be watched or possibly tested with a small position, based on its ability to act well and hold up while the general market does not. The action of stocks we follow is the best indicator here.
Know that the greater the price you pay, the greater your risk of loss. For example, if you bought a stock 5% late from its proper pivot point, then your losses would be 5% greater if the buy point proves to be false. In most cases, I would not buy beyond 5%, and just wait for the next buy signal.
