While I’ve begun studying Michael Covel’s “Trading the Trend” Collection, today I witnessed the subject matter at hand come to life on my trading screen in the forms of two picks that were on my watch list solely for their chart pattern setups – Xerium Technologies (XRM) and Innovative Solutions and Support (ISSC).
Of course, both of these stocks have run immensely in a relatively short time. Each also offered a limited risk chance for buyers to step in to be taken along for a continued ride up the trend. After high volume buying beginning April 9th, XRM took a breather on the 12th and flagged for six days in a range of 8.40 to 7.74. Upon seeing volume increasing today, once XRM broke above that range I bought shares on a retracement to 8.40. Ultimately the stock closed one penny from the high of the day at 8.58 on over two times average daily volume. My risk was limited to a stop under the range below 7.74.
I had also been watching ISSC after its high volume breakout on April 3rd and subsequent ten day consolidation in a range of 8.20 to 7.60. Late in the day, volume shot the price well past my 8.25 alert, however I had already used my available capital on XRM anyway so I was relegated to being only a spectator here. From 8.15, volume buys carried ISSC to a high of 9.18, a 12.64% increase, before closing at 8.62.
I expect both of these stocks are likely to have follow-through tomorrow, but if not I have an exit plan in place for my XRM position.
It seems highly risky to buy stocks that have recently doubled or tripled, but if you put the prices in context to make consolidations floors of support and set stop losses accordingly it becomes much easier to take a shot at riding a continuation of a trend.
It also seems counterintuitive to not “buy the dip” to catch a bargain price on a stock that is sure to rebound for profits. Yes, these stocks have already run, but what goes high can go higher. When the two primary indicators – price and volume – point toward the trend continuing, then these flag pattern breakout plays begin to make sense.