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Ask Tony
Tuesday, March 13 th, 2007
by Tony Golan
Chief Technical Analyst
StockProfit.com™
Question:
Tony,
My question pertains to JSDA Jones Soda, which was given an alert that picked up in my Scottrade account. You have it as a day trade and I'm not interested in that type of trading. However, since some indicators have it as over bought and that it did gap up so much and is so much over its moving average I suspect that is why you have it only as a day trade. I want to know when will be the right time to buy it as a long-term trade. I suspect that it might have to back up some for this to happen. Is this correct? That would be the type of trade I'm most interested in. I cannot afford to take unnecessary risk. The alert I believe said it was right for a long-term uptrend so I'm confused on why it was only a daytrade. I would appreciate if you can clear up this for me and if so I very much appreciate the help.
I am about to consider buying PRFT (Preficient) as the stock has held up well and has very good fundamentals and the technicals are improving but I'd like to wait till the MACD line turns positive to corroborate the improving RS Line. Any thoughts on this as well?
Sincerely,
Robert
 Zoom
Tony answers: Robert, let's start with the obvious. Like you said, JSDA is in a long-term up-trend. That means it is making a progression of higher highs and higher lows. That means that after an up-trending stock makes a high, like JSDA did in February just above 15, and then start to correct, the correction is likely to end above the previous low.
Indeed, the correction in JSDA from the early February high took it from 15.28 down to 11.80. This was above the previous low of 11.37 from early January. The stock then turned back up, but gave no clear signal to buy it while it was in the 12-13 area. Then, it gapped-up and rallied to a new high.
So, if a person wanted to buy JSDA now for intermediate-term or longer (several weeks to several month hold, longer if the stock keeps going), they would be buying it around 17.40, but they would have to place an intermediate-term sell-stop on it. An intermediate-term sell-stop would have to be placed .05 below the most recent low of 11.80.
The reason the intermediate-term sell-stop is placed below the most recent corrective low is because as long as the stock makes higher highs and higher lows, you don't get stopped out and you stay in for the duration of the trend. Once the stock goes below the previous low, the progression of higher highs and higher lows is broken and the intermediate-term up-trend is no longer.
That means if you buy it at 17.40, then place a really wide stop on it and actually get stopped out of it at 11.75, you would lose 32% in the best case scenario, not including commissions and slippage. By comparison, my average intermediate-term sell-stop is usually in the 8%-12% range, and never exceeds 15%.
You can't take trades with stops that huge. If the stop is that wide, it means that this is the wrong time, not the wrong stop. You have to be patient.
Zoom
As to PRFT, you can see in the chart above that the stock is in a long-term up-trend, but has had a few times over the past couple of years that it trended down for time periods of several weeks to several months in which the stock made lower highs and lower lows, also known as an intermediate-term down-trend. Such is the case right now, with PRFT making lower highs and lower lows. Also, RSD, the green histogram on the chart, is below the 25% red line. Stay away from it right now.
Lastly, I don't use MACD very often, if ever, and would certainly never use it to indicate when to enter or exit a trade. I hope you won't, either.
-Tony
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Tony Golan
Chief Technical Analyst
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