The Darvas Stock I Just Had to Buy

by Darrin Donnelly on September 16, 2010

Click on chart to enlarge.

Click on chart to enlarge.

There are some Darvas stocks you just have to find a way to own.

On Thursday, I established a position in JKS, a Chinese solar company with unbelievable earnings (up 3,833% in the most recent quarter with projected earnings of 878% next quarter). 

This stock opened for trading on the New York Stock Exchange May 14th at a price of $11 a share.  Since July, JKS has nearly TRIPLED in price, barely stopping to rest along the way.

Here’s a stock that hasn’t yet established a “sound” base and if you’ve read my book, you know that I advise traders not to take an INITIAL position in any stock that hasn’t set up a base at least four weeks long.  Aside from an initial two-month dip after its IPO, JKS has gone almost straight up, never forming a single four-week base.

So why am I buying into JKS now if it hasn’t yet met this four-week minimum requirement?

First off, it’s important to note that my position at this point is a very small one.  Because it hasn’t built a nice sound base yet, this IS a much riskier trade.  In light of this added risk, I’ve adjusted my investment accordingly.

Secondly, I’m not buying a breakout here, where the risk of a sudden reversal is high.  Instead, I’m making an initial “in the pocket” purchase near the middle of the Darvas Box JKS has formed.  By buying “in the pocket” and taking a small initial position, I’m giving my portfolio some wiggle room to handle a more aggressive and unproven stock like JKS.

These two precautions allow me to manage my risk better.

Now, why did I buy JKS today?   

Notice on the chart that accompanies this article that during JKS’s meteoric rise over the past two months, it has formed three Darvas Boxes.

It had excellent high-volume breakouts of Darvas Box 1 and Darvas Box 2, and it currently sits near the middle of Darvas Box 3 (box top: $30.64, box bottom: $24.41).

Notice how JKS broke out of Darvas Box 1 and never looked back.  Yet, when it broke out of Darvas Box 2, it retreated back into the box before continuing its rise.

Because the “personality” of this stock has already shown me that it can fall back into its Darvas Box rather forcefully, it becomes even more imperative that I try to establish a position while it’s near the middle of a current Darvas Box. 

This way, if JKS does break out of Darvas Box 3 as I think it will, I will have a lower cost basis, which will give me the room to set a stop at the bottom of Darvas Box 3 as opposed to the midpoint of Darvas Box 3.  (Had you bought JKS as it broke out of Darvas Box 2 and then set a stop at the Darvas Box 2 midpoint, you would have been stopped out of your position the following week.)

This IS a riskier trade, there’s no denying that.  These young, fast, and erratic stocks are more difficult to work with.  But, these are also the exact type of stocks Nicolas Darvas himself made a fortune with.

There are times when riskier trades can be made as long as you take specific steps to manage your risk, as I have pointed out in this article.

You also need to keep your emotions in check when playing stocks like JKS.  You have to be fully prepared for a stock like this to quickly drop 10% or more.  Again, this is why you take extra steps to manage your overall risk.

JKS could very well trend lower from here and form a nice sound base that we could more easily buy into a month or two from now. 

However, JKS has shown the ability to explode from one Darvas Box to the next and it’s quite possible that JKS breaks out of its current Darvas Box and doesn’t look back for quite some time.

To repeat the opening line of this article: There are some Darvas stocks you just have to find a way to own.

– – – – –

Learn to recognize Darvas Stocks quickly by implementing the Darvas Trading System.  Try it out risk-free for 90 days here.

{ 0 comments… add one now }

Leave a Comment