Ask Tony
Friday, March 2^nd, 2007

by Tony Golan
Chief Technical Analyst
StockProfit.com™

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Tony answers: This is an excellent question, Mary, and the answer is comprised of several parts.

First, an up-trend is defined as the uninterrupted progression of higher highs and higher lows. In the chart above, you will see that last year (the left part of the chart), CTB was making lower highs and lower lows. The stock made its lowest low in August of last year, then rallied past the most recent high and made a higher high. From there on, CTB has made higher highs and higher lows, which I labeled on the chart.

Next, one of the most important rules of technical analysis is that once a trend is established, it is more likely to continue than it is to reverse. That means that every time the stock corrects against the trend, we should expect the correction to be halted above the previous low and every time the stock makes a higher low and turns back up, we expect it to go above the previous high and make a higher high.

How long do we expect this progression of higher highs and higher lows to continue? The most accurate answer to this is that nobody knows. Since nobody knows how high an up-trend will go, and since once it is established, an up-trend is more likely to continue than to reverse, the best thing to do to capitalize on such an up-trend would be to place your sell-stop .05 below the most recent low.

So, to apply this to CTB, it made a low in mid-December at 13.57. It then rallied to make a new high in late February at 16.97. It then corrected and made a higher low at 14.56. It then rallied up to a new high of 17.49, where we issued the trading alert.

Now, if a person were to get into CTB at 17.51, as per our trading rules for entering a trade, and wanted to stay in it for an intermediate-term move (several weeks to several months), they would have to have their sell-stop set at 14.51, .05 below the most recent low.

So, in the best case scenario, if your trade was executed right at the prices I specified above, and you were stopped out of it, you would lost 17%, but in actuality probably more once you include commissions and slippage (which means execution of a trade at worse prices than you anticipated).

Mary, such a stop would be simply too wide and represent not only too big a loss to take on a trade, but it would also represent a trade that is less likely to work. The problem is that once CTB turned back up, it made a new high and that is never a good time to enter an intermediate-term trade. Had it turned up with a small white candlestick, it would have been a much better entry point for an intermediate-term move.

Finally, let me say that I do like CTB for the longer-term. That is the function of my RSD indicator. Once it crosses above 25%, the up-trend in the stock becomes much more likely to be sustained for longer periods of time and to gain bigger percentages than stocks whose RSD is less than 25%. It's just that at the moment, it is not a good time to enter CTB for longer-term holds.

-Tony

Tony Golan
Chief Technical Analyst

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