Another Darvas Box Breakout

by Darrin Donnelly on September 29, 2010

Click on chart to enlarge.

Click on chart to enlarge.

Jinkosolar is a Chinese solar company with spectacular earnings growth and since its IPO in May, it has nearly tripled in value.  This is the kind of stock that Nicolas Darvas himself would have just loved. 

On Wednesday, JKS actually broke out of another classic Darvas Box.  That marks the FOURTH Darvas Box breakout since mid-August. 

However, before diving into this stock, there are two things to be cautious of. 

First, Wednesday’s breakout came out of a very short Darvas Box.  This box was just six days long (with the bottom confirmed on Tuesday, a day before the breakout).  Typically, the longer a base is, the better the odds of success after a breakout.

The other caution flag is that JKS has a tendency to break out of a Darvas Box and then slide back into the previous box before continuing its upward march (as you can see in the chart that accompanies this article).  Some of these slides have been rather steep, beyond the box midpoint we’re usually comfortable with.

For this reason, I personally initiated my position “in the pocket” of the previous Darvas Box, near the $28 mark.  By buying “in the pocket” and near the midpoint of a developing Darvas Box, I now have more wiggle room if JKS falls too far back into the Darvas Box it just broke out of.

Regardless of where you purchased, it’s important to understand what is considered “normal” behavior for this high-flying Darvas stock. 

So far, “normal” behavior for JKS is breaking out of a Darvas Box, pulling back into the box it just broke out of, and then climbing higher. 

JKS also likes to bounce off the 10-day moving average line, which currently sits way too close to the current price for a good stop-loss to be set just under the 10-day line. 

With these behavioral characteristics in mind, you must adjust your stop-loss method accordingly. 

For more information on where I’m keeping my current stop-loss for JKS, you can get all the details in the current issue of Darvas Trader PRO.

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* Portions of this article appeared in the September 29, 2010 issue of Darvas Trader PRO.  You can try Darvas Trader PRO risk-free for 30 days by clicking here.

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