Friday, May 02, 2008

Base and Break: DRYS

Grasp the following, and you will comprehend the base and break, which is the primary system in which we make our living.

1) A great daily that has been in our newsletters repeatedly over the last week.

2) Today the stock gaps up with volume: probably the best combination of all is a gap-up, base and break to target.

3) base and break - failed

4) base and break to target - successful

As soon as the stock gapped up (3%) it became our focus for the day (we're only watching around 10 stocks, so it stuck out easily). It was the only stock with volume on our list. The stock set-up at 86 for a base and break. First entry was to buy the break, and as usual, stop at any reversal.

Step 1: Buy this base and break at 86.

Step 2: Get out immediately as the stock has reversed back into the base.
If you can't move fast, then our type of trading is not for you. This is not the type of system in which you put on multiple positions and go get a coffee. This system requires attention and the ability to move quickly. If you freeze the 20 cent loss could turn into a 1.4 point loss.

As long as the stock does not fill the gap, and DRYS did not, do not lose sight. The stock set-up very well again at 86 in less than 20 minutes. Note how the stock was bought up from that deep spike down. This is a very good sign and shows how much buyers want this stock.

One more time, buy the break of this base at 86 with stop on any reversal. The primary target is, as always, the daily number.

Very smooth move straight from 86 as buyers tripped over themselves buying the stock.

As usual, the stock goes to target, spikes over, and reverses. Sell partial at target, and hold the rest for possible continuation with stop at the new intraday base. The new intraday base at this point was 87.6. Therefore, buy 86, sell partial at 88, then move stop to just under 87.6 in case the stock continues upward.

This is a perfect example of buying the base, and selling the vertical line. The stock set-up 2 points under the 88 daily spot. Active day-traders who bought at 88, which was actual resistance, made the mistake of buying on top of a vertical move a stock that is far away from the base. Swing-Traders have much wider stops than we do (for example 2 points compared to 20 cents) and can be more flexible with entry points.