I mentioned last week that one of the major roadblocks for this market’s rally attempt was the 200-day moving average line. The market reversed on us the last three times it challenged the 200-day monster.
On Monday, all three indexes exploded through this line and ended the day strong. Volume was also higher on all three indexes – another sign of strength.
While we’re not completely in the clear – the indexes could certainly reverse back under the 200-day line just as quickly as they broke through it – it certainly looks like we’re at the beginning of the type of rally Nicolas Darvas would be diving into.
Because we’re still AT THE BEGINNING of this rally (it’s only been 12 trading days since the September 1 follow-through day), it’s important to exercise caution.
This means easing into positions and not getting fully-invested right away.
Focus on only the very best D.A.R.V.A.S. stocks; those with the strongest earnings and strongest relative strength.
And don’t chase those stocks that have already blasted off too far from a decent buy point. If this rally is as strong as it’s looking to be, such stocks will give us plenty of sound buying opportunities in the weeks to come.
The 2 Stocks I Bought Today
A great way to ease into positions is to find stocks that are still “in the pocket.” That is, stocks that are still in the process of building sound bases, but trading just above solid low-risk stop levels.
For instance, I bought into AAPL today.
[Please note: we’ll be launching DARVAS TRADER PRO later this month. Not only will a subscription to DARVAS TRADER PRO include access to THE DARVAS REPORT, an extensive Darvas System newsletter published twice a week, but subscribers will also receive instant email alerts whenever I make a purchase or ecit a position. For more information regarding DARVAS TRADER PRO, please make sure to sign up for the free DarvasTrader.com mailing list. Just enter your name and email address at the end of this article. ]
I initiated a small position in AAPL that allows me to use the 50-day line as a stop. Because the 50-day line is about 5% below my initial purchase, I’m not risking too much damage to my overall portfolio if this stock fades out on me.
On the other hand, the upside potential for AAPL if this market really takes off (because it’s such a hot name, in such a hot industry, and has such huge earnings) is huge. The reward far outweighs the risk.
I also initiated a new position in our old friend, BIDU.
While we were stopped out of this position last month (in what was a 69% profit had you applied the Darvas System to it), it now looks to be forming a solid Rounded Base. (You can learn how to identify the five most powerful bases for Darvas stocks in Chapter 5 of my book, Secrets of the Darvas Trading System.)
I made an “in the pocket” purchase today in order to lower my risk if it breaks right out of the Rounded Base without giving me a low-risk spot for a stop. (As explained in my book, I’m not a fan of arbitrary percentage stop losses.)
The key when making “in the pocket” purchases – or any purchase at the beginning of a new rally – is to EASE into them.
I know I’m sounding like a broken record here, but it’s important to hammer home this point. You can chop down your trading account VERY fast if you jump into new rallies too aggressively and continuously fall prey to sudden reversals.
Right now, the market looks like it wants to go much higher. But looks can be deceiving. Focus on only the very best available stocks and make sure you EASE into your positions.
– – – – –