Ep. 300 How To Listen For Sell Signals And When To Stick To Your Hold Rules
01:07:05 Share

How will clean energy drive tomorrow's economy? At Brookfield, we're answering the questions that will define our future. Accelerating the transition to net zero while creating lasting value. Learn more at brookfield.com slash zero compromise.

Hello and welcome to another episode of the Investing with IBD podcast. It's Justin Nielsen here, your host, and it is December 18th, 2024. It was a Fed day, so we've got a little bit to talk about that as things came in quite a bit. And to help walk us through it,

because what better time to be talking about holding rules and selling rules than when you get a kind of daylight today, we've got Kathy Donnelly. She is one of the coauthors of the life cycle trade, uh, recently got into investing, uh, coaching. So, uh, great to have you back on the show, Kathy. Of course, we've known each other for, I think almost 20 years now. Uh, yeah, I think so. Uh, she was one of the frequent, uh, attendees of our master's program with the, uh, you know, uh,

with Bill O'Neill leading seminars. She's done IBD meetups. I've gone to a couple of those of hers. So yeah, it's great to have you on the show, Kathy.

Thanks, Justin. It's great to be back. I wish the market didn't end the way that it did, but that's just how it happens sometimes. Well, you know, I almost am glad that it did because again, when you get a day like that, that really can shake your confidence. Um, it's, it's important to kind of make sure that you're going back to rules as opposed to just these emotional decisions. And, uh,

Nothing is more emotional than seeing a big drop in your portfolio, especially when you look at the dollar amounts. It can be disconcerting. And so if you are only looking at, oh, my gosh, I'm losing so much money, you can real easily lose sight of, well, where did I come from? How much am I giving back? And that's such a big part of your equation. How much am I up and how much am I giving back? And is that ratio, I guess, in line?

Right, exactly. I mean, I think the mindset is so important when these things happen. And like you mentioned, having the rules to keep your emotions in check. And I really like to think of it as decisions ahead of time. So, yeah, I'm following rules, but I've decided on these rules. And so then that keeps the balance there for the emotions. I'm not making emotional decisions. I'm making decisions based on the rules that I know work for myself. Yeah.

Right. And I mean, I think you probably remember Bill O'Neill would sometimes use, you know, boot camp as one of those examples. You know, in boot camp, you're faced with all these, you know, test situations and you learn how to react kind of without thinking in some ways, you know, because, you know, in this scenario, I do this. In this scenario, I do this. And you don't really have to think. You've got your checklist because you've made those decisions ahead of time. And I know one of your co-authors, Kurt Dale, being a pilot,

for as many years as he's been, you know, pilots have to have their checklists, you know, because if you, as Bill O'Neill, the founder of Investors Business Daily used to say often, pilots, it's so important because, you know, do you want to live? You know, it becomes very important for those checklists to be in place. I'm glad you brought that up because I was just listening to the level three, the very first level three that I went with Bill in 2006.

And he brought up the pilot example. And he said exactly what you said. You follow all the rules if you want to live. And so it's the same thing. If you want to live to trade again, preserve your capital, then you follow your rules. Yeah, absolutely. Well, let's talk a little bit about the –

and how we kind of finished. So let's go to the NASDAQ. I'm going to go ahead and share my market search chart, and we will take a look at how things kind of came out. And, I mean, look, the market was looking great. I mean, if we just...

Let's just go back a day and have a look at that because we got the NASDAQ composite above 20,000. It poked its head above here. This was an accumulation day. We had heavy volume on a strong day up as we poked into new high ground. Yesterday, look, it was down a little bit, but closed in the upper part of its range. You really couldn't ask for better action except that we had –

a breadth issue. RSP, this is the Invesco S&P 500, equal weighted ETF, showing a lot more negative action. For those that look at the Dow Jones Industrial Average, I mean, that was coming in pretty consistently. Russell 2000, that had been pulling back. So basically,

If you were in the NASDAQ, everything was fine. If you were anywhere else, not so much. And it's probably worth taking a look at the FANG Plus Index. These are 10 stocks, many of which are part of the original FANG, being Facebook, what is it, Amazon,

Was it Amazon or Apple? I just blinked. But Netflix, Google, now, of course, they've added Broadcom, CrowdStrike, a few others of those magnificent 7-type NVIDIAs in there. So...

Again, all of these were looking good, but now let's go ahead and add today, and it really kind of changes the look. The NASDAQ came down a little. Go back to the weekly real quick on the NASDAQ, Justin. Yeah, let's do that, because this got below its 21-day moving average line, but-

Yeah, the weekly doesn't look nearly as bad. Well, you know, it's funny because I actually – when I looked at this at the end of last week, it actually looked slightly parabolic to me. I don't know. Do you see it? Yeah. So I expressed some concern a little bit to myself like, oh, the weekly looks a little parabolic. So –

I guess with that in mind, I can't be completely surprised. However, the drop was definitely more than I was expecting for today, for sure. And I mean, look, we've had some really strong, I mean, the angle isn't that different than some of these previous rallies that we've had this year. This is...

really been a strong year for the NASDAQ. Um, so it, it has been kind of in line with some of that in terms of that angle. Um, but yeah, if you were looking at other measures, um, again, FNGS, you know, maybe a little bit, uh, more so the last couple of weeks, you know, as it kind of angled a little different, um, you know, recently. And of course that's, what's been kind of driving the NASDAQ. Um,

Do you look at breadth that much? I mean, a lot of people are making a big deal of breadth right now. I mean, I do look at it because I'm a devoted listener to the stock market today. And so, you know, you guys look at it. So I do look at it and I keep that in mind.

But, you know, at the end of the day, like I think you've heard you say and all of you say many times, it's like, well, what are our stocks doing? But, of course, we have to keep all of that into perspective to inform our decisions. Right. So, yeah, you're absolutely using market indexes, different indexes, and at the end of the day, your own portfolio because it doesn't matter how great the indexes or poorly the indexes are doing. It's really what's happening with your money, how it's going to be used.

At least that's my selfish take on it. Right. Well, when we look at precedents, when we look at precedents for super gross stocks, true market leaders, whatever you want to call them, you know, we look and we say, wow, look at this great run up at

It looks like it had no issue at all. We forget all these days like today that happened in the middle. And so that's why it is so important to look at your stocks and not just sell because, oh, the market's down and we had this horrible day when your stock looks completely fine. Now, eventually, if the market's bad enough, it will, of course, get them all. But not in every instance. There's always that one and two, that they're really the leader in their group and they keep chugging along.

Yeah. And I think this is why it's so important. And this was something that we talked quite a bit about on IBD Live this morning was it's really important to kind of use that change date feature because when you change the date and you don't see what happens afterwards, two things happen. Number one, you kind of –

You know, you're looking at things as they would be at the moment. But the other thing that can happen, especially after you've been running up a long time, is on an arithmetic chart, it's going to squish things, you know, that are way down there. I mean...

That's just the nature of the math. It's going to make things look really condensed. And so it can be very deceiving when you look at a day that is condensed. It's like, oh, of course I would be able to survive that. But if you change the date and you see, oh, yeah, that was a big hit, it looks quite different.

Well, and if you change from a daily chart to a weekly chart, then you're like, oh, this really isn't that big of a deal as well. Or a monthly chart because you do look at monthly charts a lot of times to make some of your decisions. And yeah, that's a whole different thing. One bad day in a strong month, it doesn't even show up. Right, exactly. So let's go back to the NASDAQ daily though real quick. Sure. And I think I said this

Either on IBD Live or the last time I was on the podcast. I can't remember. But I really, really liked what David Ryan said about following kind of the reverse follow-through idea. And so since I've heard him say that, I kind of just monitor the market indexes in that way. So this would be like a day two. I mean, it was a big day two. Mm-hmm.

But technically, you know, it's day four later if you're doing in the reverse for the rally uptrend starting. So I would be doing the same thing here. And then once if the new high gets negated or whatever happens, then I would eventually be looking for day one on the other end. But I felt like that's really kind of helped keep me in check and also just be aware again.

Using it just for the market information, still looking at my stocks accordingly and what they're doing, but just so I have a sense of what could be happening next kind of thing.

Yeah. And in the same way that not all follow through days work, I would imagine we would find not all reverse follow through days, you know, turn into a disaster either. But if you kind of get in a mindset of, oh, this this was an inflection point. This was an important day. It can certainly kind of change change your mindset in that regard.

Since I've been following it, I find it really helpful to keep me in check. And I feel like, I mean, it works. Mm-hmm.

I haven't studied it. I haven't done, you know, any long-term research going back in time or anything, but I feel like it works just as well as it works on the upside. And, you know, you could literally just flip it just like with head and shoulders, couple of handles, you know, you just flip them over. You got a bearish pattern and then you flip them back. You got a bullish pattern. I think it's really just the same thing.

Yeah. And I would kind of point to this area right here because I was getting a little concerned. You know, if you had said, okay, this is your anti-rally day and this was, you know, your day two, you never got the follow-through, right? Right. The follow-through to the downside. Yep. So, or the reverse follow-through day. You know what? It's funny because I'm watching Flash with my son right now and so there's the reverse Flash. So I'm totally in that mindset. Oh.

Interesting. But yeah, you never got it there. And same thing here. Yes, you kind of had this flat action, so maybe you could have said, oh, based on the fact that your high was here, that you could have said that this was a day four, but then you never got kind of your subsequent action. So yeah, I do think that there's value to that kind of analysis. And you know,

Now, as always, you know, when you get a bad day, it's kind of like what happens afterwards. And especially on a Fed day, there's always the reaction, the counter reaction, the counter counter reaction. So we really don't know what we have in store for us tomorrow. I mean, we're we're taping this on Wednesday. You know, it's live on YouTube, but tomorrow could be a whole nother day. It could get worse or we could see a little bit of a bounce back as people said, oh, well, maybe that was a little overdone.

Right. Yeah, exactly. And, you know, so, yes, it's hump day. Right. So we got two more days left and anything can happen. But, you know, we're prepared for the worst, but we're also prepared for, you know, not the worst. We're always prepared for both sides, I guess, is the best way to say it. As you said, if you're kind of thinking ahead of those situations and those scenarios, then you you're you're you're getting your playbook ready.

up to date, and then it's just a matter of trading your plan at that point, as opposed to having to make an emotional decision in the moment when the bullets are flying, as it were. Exactly. Anything on the sector side, again, because you've got small caps acting differently, a lot of the sectors have been poor overall, except for tech and consumer discretionary, some of the communications sectors.

Really, again, where those FANG stocks, that FANG Plus index lives. Do you do much sector analysis when you're doing your market analysis?

I actually don't do any specific sector analysis. I mean, I'm always looking to see where the stock is, what the group industry rank is of a stock that I'm looking at. So I'm keeping that in mind. And of course, I'm aware, you know, I still remember when Ali asked me a question on IB Live a couple years ago about, you know,

I think it was computer software database and, you know, it was like a down group. And I was like, well, you know, they all have their moments and they rotate just like oil and gas, you know. So I just always keep that in mind. I've tried looking at industry group as a leading indicator, but I just feel like it's just easier to find the stocks that are moving and then see what groups those are and being aware of it from that standpoint.

Yeah, especially when you're looking at relative strength. It's, you know, sometimes by the time the relative strength really kind of turns, you know, it's a little bit more obvious as opposed to some of those other places where you could be seeing support at moving average lines or breaking above moving average lines. And, you know, you have talked about

You've mentioned moving average lines and, again, how far things come down and stuff like that. So maybe AI is coming to your industry if it isn't already here. But AI needs lots of speed and computing power. So how do you compete without costs spiraling? Upgrade to Oracle Cloud Infrastructure or OCI. OCI is the blazing fast and secure platform for your infrastructure, database, application development, and AI workloads.

Right now, Oracle is offering to cut your current cloud bill in half if you move to OCI. For new U.S. customers with minimum financial commitment, offer ends 12-31-24. See if your company qualifies at oracle.com slash wallstreet.

shift gears and for this segment I'm going to go to your slides because you have a lot of different things in which you talk about how you have come up with your hold rules and I'll

A lot of this is what you learned directly from those seminars that, you know, Bill O'Neill was giving. And then you've kind of made them your own. So maybe you can kind of talk about that process, starting with, you know, what some of the things you learned from Bill were.

Yeah, absolutely. My goal for today was to share some holding rules, you know, where obviously we've come up from some first stage bases and even second and third stage bases in some cases. But then there's also some rotation where we've got some new bases popping up. And so I thought it was a good idea to review some of these holding rules so that people can decide if these are, you know, something they want to put in their toolbox.

And so, yeah, this is one of my favorite quotes from Bill. You know, it's the sitting that makes you the money, the patience. You know, it's investors that can be right and sit tight are rare. And I've shared many times that, you know, I would go to the level four and I'd see all the charts and all these great true markets.

super gross stocks and I was like that's what I want you know I want the whole entire run so it was always my journey to figure out how to do that and so what I'm going to share today or yeah directly from Bill and yourself you guys you helped him put together the articles and I'm sure people have seen them before but I'm going to really highlight some specific things on that holding and

So let's go to the next slide. And, you know, Jesse Livermore, this was also another one of my favorite quotes. It was never my thinking that made the big money for me. It was always my sitting. And, you know, another way to think about that, too, thinking, you know, you don't want to think too much, right? Yeah, yeah.

So, you know, you can outthink yourself out of a position very easily. I've done it many times. Exactly. Exactly. So we figure out, you know, decide what rules we want to follow and then and then the decisions made. So no other thoughts have to, you know, come into there. You know, of course, they're always going to happen anyway. You know, oh, Fed, this, that again or this, you know, whatever. Oh, this much. That's so much. And then all of a sudden you go into this, you know, the rat race.

the spinning wheel or whatever, the hamster wheel. There you go. I'm also watching Humans vs. Hamsters with my son. So that was just top of mind. Exactly. So, okay, so let's go to the next one. And you know what? I'm going to make one comment on this quote because when Jesse Livermore, to my recollection, he actually emphasized it even more because it was, you know, he ended with, it always was my sitting. You got that? My sitting is.

Kind of really, really drum that point home. But let's, again, for people that have seen you before, they are probably aware of your MCP, your mental capital preservation. So for those that haven't seen your math here, maybe just kind of walk them through real quickly how you look at things. Yeah, absolutely. So these next two slides, we're just going to talk about some holding ideas.

for folks to consider if they want to consider that as part of their strategy. And so the first one is, yeah, the mental capital preservation. And we talk about it a lot in the book, The Life Cycle Trade with my co-authors, Eve Bobak, Eric Kroll, and Kurt Dale.

And we're going to really I'm really going to focus a little bit more today on the math, which I haven't really talked about in my other presentations and how it kind of relates to holding and withstanding pullbacks. But it's real simple. You know, what how much gain do you want to retain? Do you want to retain 100 percent of your gains? Well, you better sell right at the top then. And nobody, nobody's that good.

Or do you want to sell 50% of your gains? And what retention is going to help you preserve your mental capital, be able to sleep at night and all those kinds of things? And for me, it's going to be 50%. And we'll talk about that more in a second. But it's really simple. You take the highest gain you've achieved. And then you just take what you multiply that gain, that dollar gain by whatever percent. So if it's 50%, if you have a $10 gain,

So that's $5. You want to retain at least $5. You just add that to the price of what you paid, and then that's your stop for a 15%, 50% retention of gains. And it's really important that people realize that you've got to sacrifice somewhere.

Yes.

You're not going to have a lot of these triple digit gainers. You can't do that if you're not willing to take a 10% loss from the top. Not a 10% from your initial capital, but a 10% loss from the top. So yeah, those drawdowns and how much you're able to withstand is very important.

Exactly. And Bill used to say that, you know, you're not going to always get the very top or the bottom. So it's got to be somewhere in the middle. And everyone's time frame is different. I know we talk a lot about time frame. So just to remind everybody, you know, I'm always looking for that first stage base. And if I miss the first stage base and I'm looking for that second stage. And then, you know, I really want to be...

have very good stock selectivity and every stock that I purchase, I'm looking at it to be hopefully that next super gross stock. If it, you know, if I'm lucky enough to get those. And so, um, I'm implementing these kinds of rules from the very beginning. Cause that's my mindset. I don't, uh,

I'm not a swing trader. You know, my lifestyle is such that I want to sit and go bike riding or, you know, go for walks. So maybe it's, you know, it's my walking or my bike riding. And for those that don't know, you've trained, you've actually done Ironman triathlons, which...

Yeah, that requires some training, and it's hard to do trading and that level of training if you're moving too fast in the market. Right, exactly. So I really want to have my trade plan ready for the week.

And I'll have, you know, my stops set for just alert me what's happening so I can be aware. But usually my decision day will be Friday, which I'm going to talk about in a second. But even my purchases I have automatically on stop buys most often.

So anyway, we better get going. So the next bullet is the 10-week moving average. The 10-week moving average is one of the key lines you guys know because you watch IBD, and we talk about that line a lot. And so the charts we'll see in a second are directly from, again, I said William and O'Neill, and Justin helped him edit them. So we're going to look at those in detail to give you some more ideas. And then let's go to the next one.

And then these are just some other ideas. So I already talked about the 10-week moving average, which we're going to, again, show in more detail. But again, I'm a long-term trader, so the 40-week moving average is really important to me. You know, one of the holding rules that Bill used to talk about was like the first touch of the 10-week moving average after the first breakout is usually okay. It can be an add-on point. And then maybe the second or third, maybe you start to worry about more of a correction.

But I also have noticed the first touch of the 40 week moving average on a super gross stock can also just be, you know, the first one's okay. And then the second or the third one's when you really need to start to worry. So,

So I've kind of applied that same rule from the 10-week moving average to the 40-week moving average. And in the book, we did studies on the 40-week moving average line and found that that is the way to get the biggest gains, but then also the biggest drawdowns, which is why the mental capital preservation and the retention of gains is so important.

And then were you going to ask a question, Justin? No. Okay. And then key levels like, and again, $50, $100, those round numbers, if a stock can hold those levels when they're correcting, is it an important thing that you can look at and also use as a potential stop or area to evaluate? Yeah.

And of course, earnings gap closes where they close for the day after a big gain. You know, those can be levels to get into a stock if you did, if you missed it. But then also where you would like to see a consolidation to happen.

And to hold if it's going to be stronger, strong and continue moving with the market if the market is correcting, which usually is what's happening. And then you can also look at it from days, weeks, months, years, again, time frame. And, you know, I had to use months in years when I was looking to hold NVIDIA for a long period of time. And that's one of the things that helped me. So you can really apply these types of ideas to any time frame.

But all details are important. We do still have to consider the market. We do still have to consider what the company is doing. We still have to look at their fundamentals. There are many, many details. And that's the other thing, Bill and Neil, you always say, details, details, details. Yeah. So these are just one. Rules, rules, rules. Details, details, details. Right. So we'll be sharing some details with you today. But, of course, they're not all one and done. You still have to consider everything. Uh-huh.

Okay, so this is the withstanding pullback chart. So this is like the mental capital preservation. So what we have here on the x-axis, x-axis is the percent gain achieved. So you see here we go from zero to like, I believe 400, 450, 400.

And then on the Y axis, we got the percent of the pullback. And so the idea here is to give you an idea of what can you withstand based on what gain you've achieved. So that first line that goes like directly straight up, that's the gain equals the profit, right? I mean, that's the ideal situation in an idealistic world that's not real. Nobody's that good.

And then the next one is the pullback percent that makes you break even, right? So of course, we don't want to have like a 400% gain and then hold it for an 80% pullback and then, you know, give it all back, right? So that's not ideal situation either.

But then look at that orange line, not really in the middle, but in the middle. That's the 50% retention of gain line. And so you can see there with a 400% plus gain, you know, you can withstand up to 40%. So a cup base on average, you see as we have, I have that drawn there in the green line, 30%, flat base, 15%.

So if you're willing to give back 50% of your gains, you can go a long way with your percent gain achieved and really not have to give up more than what would be a normal cup with handle base.

Now, obviously, bull markets, cup with handles can be deeper than that. Those things get taken into consideration. And then that's when you have to, you know, expand your time frame and look at other situations as well if you're going to go for the longer-term hold like I did with NVIDIA, which is what Justin and I talked about when I was on the podcast earlier this year. But this can get you – for me, I use it for, you know, anytime I have 100% or more, I'm using this as a –

I implement this rule. So that'll get me to almost a 30% pullback. 150% will get me exactly to a 30% pullback. And then again, the details. So then I'm looking at other things in addition to that. But that's gotten me a long way. And so this is the magic math of it. Yeah.

So hopefully... And a picture's worth a thousand words. So again, it really kind of helps to see how that works out. But just to be clear, because I want to reemphasize what you said here, this is not everything that you're applying this rule to. This is the special ones. And really, it's once you have that...

triple-digit gain on something, it's a true market leader that you're applying this rule. And it's certainly not that you're letting something get away from you that is an early position where you don't have a lot of profit. It's not like you're going to be sitting through a 30% pullback there if you don't have the profit to...

you know, to justify it. Yeah. Thanks for reinforcing that, Justin, because you really want, you need to have the space between that first and second stage base. Let's just play that scenario out. If you've got that first stage base, you know, it can't just be 20% gain and then it stops. You're not going to implement this rule. You've got to have a stock that's gone up 50% or

or more at least, you know, to get you to your second stage. And then maybe that base holds the 10 week line and then you get a little bit more and then you can really start to apply this rule. And so for NVIDIA, again, I just keep bringing that one up because it's the easiest one and more, I'm just the most familiar with it. You studied it quite a bit. I studied it quite a bit. So it gave me that space. I was able to do that, but you know, I also did it on Twilio, did it on Etsy and some other ones. Right.

But yeah, you really need to have at least 100% gain, which is what I do. 150% might be good for other people. When I have a stock that only has gotten up 50%, you know, I'm not using this rule and I'm actually just setting a line in the sand around 30% because I'm not going to take off more than that. Um, so yeah, so it really has to be on those select, really great, powerful stocks. Uh, can't just, you don't want to apply it just to anything. Yeah. Uh,

So you mentioned that Bill O'Neill used to write a column every week. This came out on Wednesdays a number of years ago. And yes, I was the one that was typing all of that stuff in and making sure it all fit on the charts. And we would go back and forth, usually via fax. But

What's great about these, and by the way, for those that don't know, Rachel Fox has been doing a series where she kind of breaks some of these down and goes a little bit more into some of the analysis there. But these are not what Bill necessarily did.

You know, a lot of times he would do kind of a post analysis on these great stocks and kind of say, OK, what rules could I have applied to really keep me in? And it's not like, oh, let me just make up a rule. It had to be a rule that you could apply consistently over multiple true market leaders and not just like, oh, you could use it this one time and that was it. You know, so how did you go about kind of

drilling down a little bit deeper on some of these, because again, I know you really kind of tore apart the workbooks and, and a lot of things that you, you received over the years in terms of your analysis. So how did you kind of approach these?

Yeah, so the few handful that we're going to look at today, and it's not all of them, but it's the ones... I think there are about 50 or something that we did. Yeah, yeah. It's the ones that... I pulled out a few of the ones that said, do not sell. And I was thinking to myself, where have I ever seen him say, do not sell? And actually, the funny thing is, is when I re-listened to that Level 3 recording, which was the very first time I ever heard Bill William O'Neill speak...

He actually did say in there, and I didn't catch it because I was just a beginner, like, you don't always have to sell just because it breaks the 10-week moving average. And then years later, I see these articles, do not sell. I'm like, what? And so now, you know, it came together, you know, many years later. And so basically... And it's the important thing to realize that for as many rules as Bill had, he also had a lot of exceptions to those rules. Right. I mean, they were based on his years of experience knowing, okay...

Here's a general rule, but when you've got something special, you want to make exceptions to keep you in. Exactly. So you've got to have all the pieces of the CANSLIM acronym. I mean, that really is key. So when we say special, we'll just say it's got all those characteristics of a CANSLIM stock.

And so, yeah, you want to look for ways to hold it longer. And so we're not going to read exactly what's in this bubble word for word. You guys can look at it on your own. But basically what he's saying is that just because it pulls back and it goes below the 10 week moving average, what's really important is what is the volume doing also on a weekly basis?

on a weekly perspective. So here he's got an arrow pointing to those weekly average volume that's below average volume as it's breaking the 10 week moving average line.

And so the hard part, right, is patiently waiting for Friday because people want to, like a day like today, potentially are nervous and scared and maybe already selling some. And there's nothing wrong with that. That's totally fine. But with this awareness and a stock that you already know has already acted like a super gross stock,

then maybe I can wait for Friday to make my decisions. And that's what I really tried to do based on what I've learned here. So that's the first one. Yeah. And by the way, this is – it used to be called the country's best yogurt or this can't be yogurt. They changed the name to TCBY. This is no longer a company that you can pull up in market surge anymore.

But yeah, certainly the frozen yogurt craze of the 80s was a real thing. And I wanted to include that one because the bubble is really important. So hopefully you guys go back and read that. And it's basically what I said, but it's always good when you see it directly written from the words of Bill. Yeah.

Okay, so here's Chipotle, which is still traded. And this is a little bit of a nuance, but the same principle. Now, here he's actually describing where he, you know, we're assuming that you bought that 16-week cup with handle that he has noted there on the left there on the bottom. So you already have a big gain. So this is where I was talking about, you know, for me. So already, let's assume I bought that 16-week cup.

with handle and I already have the hundred percent gain. So not only can I apply my mental capital preservation rules, but I can also apply these other rules of holding a stock, which is again, looking for, uh, a nice orderly low weekly average volume pullback when it happens below the, um,

10 week moving average. And in this case, it's actually, and we wanted to highlight it, it's 8.2% below the 10 week moving average. So again, you have to like have all that in mind being like, oh, 8%, well, that sounds like an awful lot. But then you have the perspective of, okay, well, what is that from your retention of gains perspective? Maybe it's also holding some other levels. And then also we know this is, you know, a high flying stock and has the potential to do more.

You want to add anything to that, Justin? No. I did trade this back then. I think I got into this on that September 1st, 2010 follow-through day. This is one of the stocks that I got, and you can see that this was an easy hold. This is how I can hold them, is when they go up every week and don't test me. Exactly.

But then I think I was out of this before it actually undercut the 10-week moving average line. So, yeah, I have a soft spot in my heart for this one. Nice. All right, let's go to the next one. Okay. So, okay, Microsoft. So Microsoft is still traded today. So I've highlighted a few of the sections that we're going to zoom in on on the next slide. So here –

Again, I'm noting here about the volume. So this is blown up, and you can see it's about, I think it was about 9%. I think it was about a 10% close for the week. I can't remember exactly what the percentage was there. But again, the volume was below average. And then the next week,

you know, you had the secondary buying opportunity or, or the buyback if, if you did sell it. But again, I'm looking for those compounding gains. So hopefully I'm actually adding there and holding in that situation. And then in the next one, you see actually volume is a little bit higher. And what's really important too. And again,

You'll see this when you read the details. The first week is really the key week, the first week that breaks below the 10-week moving average. So if that week is below average volume, even though it might be 9% below the 10-week moving average, it's okay.

And that's what really surprised me when I read these articles. I'm like, what? That's okay? And then the next week, the second week, can even have more volume, which in this case I think it was –

Well, I can't see it on there. But anyway, it can come in and be more – go even lower with volume above average even more. But that doesn't matter because it was only – it was the first week is the key week. And if that one's on below average volume, then you're okay. So this is really – Yeah, and I think – Yeah, go ahead. I think it was – according to your notes, I think it was – the volume was up 16%. 16%, okay. Yeah. Right. Right.

So, yeah, we had to consolidate some of the notes. So Kathy's, you know, flying blind a little bit. I've got you, though. Yeah, thank you. So, so again, go back and read those small details because, you know, we can't we can't pinpoint every single one, but.

It's really interesting when you – and it's counterintuitive. Just like everything with build. Buy high, sell higher. Everything is counterintuitive. How can the volume be increasing and the base building where it's even going even lower and still be okay if that first week was below average volume? So you really got to set your mind like that that's okay and study enough of the precedents to again let you know, yes, this has happened before. This is a canned slim stock.

I can hold on to it for these reasons. And then, of course, that was Microsoft back in 1990. I mean, really when it was in its very early stages before the PC revolution came about. And next we're going to be going to Apple, which, again, this was before the iPhone came out. This was when it was still iTunes and iPods, and the iPhone and iPads were not even a thing yet.

The reason why I wanted to highlight this one is because this is the closest example that maybe I could use as a precedent for CAVA. Only because in this instance, Bill is saying do not sell. And I don't remember if – I don't think I have a blowup on this one. But I've got it circled here. It's a big breakdown of the 10-week moving average. When you see it, it's a big bar there. Can you put your cursor on the –

You know what? I was trying to, and it doesn't. Oh, there it is. It wasn't showing up before. So, yeah, there we go. Okay, yeah. So, yeah. So there's go up to the actual chart. So highlight where that big break is. Yeah, right there. So that's a big break. And that's kind of like what Kava did last week. And it was on above average volume.

Which in this case, I went back and looked, it was 74% above average. But in this case, Bill's actually saying don't sell. So the complete opposite of what I just told you, where the first week is the key week and it should be on below average volume. Yeah.

So the complete opposite. But what's the difference? He's saying here, great fundamentals, great stock, all the characteristics of CanSlim. And, you know, Kava has great fundamentals. And we're going to look at Kava later. So we'll see if we think this can really be a precedent or not. But I just wanted to highlight because there's just so many nuances. And again, all those details play into the decision making.

Absolutely. And then, of course, here's Netflix. I do have a position in Netflix now still, but not from back here. Not from back here. That was a buy this year. Nice. All right. Well, let's go to the zoom in on this one because this one, again, more nuances. So the first one, it will correlate with the previous when you go back and look at this, but you've got 93% weekly average volume, 90%.

This middle one, there's 67% as it's going below the 10-week moving average. And that's 67% above the average. Oh, sorry. Yeah, 60% above average. I'm so used to saying that.

I knew what you meant. Thank you. And then the next one, 37%. So it can be all over the place. When Bill first came out with these articles, we really tried to pin him down. Well, what percent is it? Is it 20? Is it 40? You never really could pin him down, right? And Justin told me the other day, he's like, well, he really liked ranges. Yeah.

So, you know, again, all the pieces have to come together. You have to make your own decisions. But I have found it very helpful to me to find out what works for me. And I will take all those pieces in perspective. And, you know, if you have to sell it, you have your line in the sand. But for me, again, too, like on the example to the left, it held the 40 week line. So even if it was above average, I know I still have another holding rule.

So, you know, if you have 10 holding rules, you know, how many of the ones do you need satisfied to hold it? Or maybe it's just one or maybe you have at least five, you know. So that's why you've got – you have – it's important to look at all those different options and then if you have enough in there to give you the conviction to hold. I should also mention that for, you know, for a lot of these exercises,

Just to reiterate what you were saying, it's not just about the break, but kind of how does it go after that? And I think this is a great example with Netflix because you come down to the 10-week moving average line, and then it's like it just doesn't want to do it. It's like, no, don't force me down there. And then even when it does close below – so again, if you're looking at a Friday decision –

So as ugly as this was at the lows, and remember, at one point you were facing like, I don't know what day it was, but you were looking at a pretty ugly, you know, an ugly bar there, even if you were looking on the weekly chart. But by the Friday, it was right back up, you know, at the top of its range. So again, like it was just really kind of resisting that downtrend move. Yeah, exactly. Yeah.

Okay, I think we have one more example. Yep, EMC. Now, of course, this is a stock that has been, you know, because of mergers and acquisitions. I think Dell bought them years ago. But I should also mention that EMC was in this rare category when Charles Harris and Mike Webster did a study of the stocks that go on to lead in a future market cycle, market leaders that lead in a future market cycle. This was one of the rare exceptions of EMC.

one that did lead in multiple market cycles. Oh, very cool. Very cool. Well, the reason why I wanted to highlight this one is because, again, another nuance and important to note, because I have seen this repeated in other stocks. Let's go to the next slide, Justin.

And so here you see when it actually broke below the 10-week line, it was on below average volume. But leading into that, you had the high volume. And so, again, alerting concern, you know, I don't know. Again, we don't know what was going on in the news at the market at the time, but...

I can actually tell you a very specific example. And Square did this where it had a big break of the 10-week. It was a big, ugly bar. But it didn't break the 10-week line, but volume was really huge. And then it did almost similar to this. Then it broke, and then it was very light. And then it came back and still went another, you know, however many percent. So this is another, you know, they're trying to fool you. Yeah.

They're trying to get you out, and then they put it a little bit below on below average volume, below the 10-week moving average, and then they just get back in.

And I also want to add that a lot of times when Bill was looking at, you know, these these charts again, looking at the weekly, he would look at the closing range for the week. And 40 percent was one of the things where he would look at and say, look, if you're in the if you're above 40 percent in your closing range, that's probably more like supporting action. And if you saw heavy volume, especially on kind of a wider bar, he would look at that as actually a positive.

It might look bad because it's a pink week, but he would look at it as a positive. Yeah, exactly. Okay, so...

Decisions ahead of time. Again, this is from Bill. You have to buy using rules. You have to hold using other rules. Sell based on selling rules. No opinions, emotion, or ego. Easier said than done because we're all human and humans unfortunately aren't perfect. But we strive. We strive for it. If your business needs a new application, then developers will have to write code. A lot of code.

If an application needs to be modernized, then you'll need time, resources, and caffeine. If this sounds daunting, then use Watson X Code Assistant. Built with IBM's Granite code model, it's AI designed to multiply developer productivity so you can generate code quickly. Learn more at ibm.com slash code assistant. IBM, let's create.

So let's go ahead and shift in this segment and talk about maybe some stocks that we can apply some of this to. And I'm going to go ahead and go back to market surge. And maybe we can start with Kava. You brought that up because you were looking at this one. Now, I'll be honest. This is actually, I think, of the year for me. This was like my number three in terms of gain or number four. It was up there. But I did...

I did get scared out, you know, with this break of the 10-week moving average line. But I want everyone to understand, I do not have the stomach that you do.

Like I have never gotten the gains out of a single stock that she has. You know, I don't have the stomach for it. I have to kind of find my own level of mental capital preservation. And for me, 50% was too much. So I don't get those gains that she does. But talk to us about Kava and how you're analyzing this break of the 10-week moving average line that I'm sure –

shook some folks because not only did it have this break, but it also was following this really kind of ugly earnings reaction. I mean, it was up on the earnings day, but it just gave back so much. So walk us through your thought process here.

Yeah, absolutely. So that earnings bar on the weekly chart definitely looks ugly, right? And we could say that that was similar to EMC in a way where you had a bad bar when volume coming with it, but did not break the 10-week moving average. It actually went up just a little bit more following the line before it actually broke.

And so, Justin, let's just get the data there. How much below the 10-week moving average line is it? And also, what was the volume on that week? So for the week that it broke, it was 10.5% below the 10-week moving average line. And the volume was 46% above average for that week. Okay. So based on the examples we looked at,

That could be normal. And look at the run that it's had. Right. And look at the fundamentals. We have 95 composite. We have...

80 or 90 EPS and then yeah there it is 81 yeah you went down too fast I couldn't read it fast enough and we have we've got the triple digit that you already showed there at the bottom so we have a lot of things going for this stock so far and it hasn't really had a super meaningful correction so it might it might start to correct now now I chose not to sell it last week and

And I was looking at a different level for holding. So now let's go to the daily chart, Justin, and I'll show you what level I was looking at, which today it broke below. So if we go back to the last high volume, it was around 122. Yeah.

I was using a high volume of 122. Is that it? Was right there. Let's go to the track change. So this was a 122. Yeah. 122. So I was going to use that as like another holding level to see if it held, which today it did not. So I'll have to see on Friday, decision day, Friday, uh,

What I'm going to do. But I also have what other levels can I watch for holding? Well, I've got the 100 level. Okay. Would need to hold 100, which is right at the 200 day moving average. So I like that. I like that those are both at the same spot. And of course, this is what I would have to take into account my cushion, which I have a pretty good cushion on it.

So I've got, you know, what is that, four or five different holding rules that I'm looking at that was going to hopefully keep me in a little bit longer because I do believe that this, you know, could continue to run. But I also believe it could base for a while. So if it bases above 100, like I'm OK with that. And so that's one of the ways I would apply some of these holding rules and things that I'm looking at for this particular stock.

Now, let's talk a little bit just, you know, again, so people can kind of understand the other. Another important element here is position size. And how large do you kind of let your position sizes get? Because being able to withstand some of this pain is very different when you've got a 30 percent position size versus a 5 percent position size. So where do you usually fall with your leaders?

Well, I was late to this party, unfortunately. I did not get in way in the institution due diligence phase. Go back to the weekly for me real quick, Justin. Yeah, so back in the 50s, I was not in it at that time. So if I had gotten into it back then, I would probably have two positions worth in there or almost two positions worth. And then...

And then if I did, then I would be cutting some back ahead of time and just holding that course, which would be the first position size right around where the 50 would be. Not all the add ons that I may have done along the way as it touched the 10 week moving average. So I only have like one position size worth in here. And so it's not that big. And what is roughly a single position size for you?

Yeah, so it's like 12% for me. And then I try to get it to like 24 would be the goal, but I'm not always getting to that. And then I will hold on to that through a successful third stage base. And then like with NVIDIA, if I really feel like it has the potential for the long, long term, I will sell –

all those add-ons and then just keep that core at the, yeah. And one, one other question here, just again, to make sure it's kind of understood because I,

You start maybe with a 12% as your full position, but when you've got something like NVIDIA where you're up hundreds of percent, it's very, you know, that position size changes. It gets a lot heavier. So are you, do you take any profit along the way to kind of just bring it back down in terms of the position size? Or are you just kind of like, I'm going to let it run and go that way? Yeah.

Yeah, no, I just sell the same number of the shares. So whatever the shares were that were the add-ons, I'm selling those exact number of shares. So I'm not, I guess, technically sharing shares.

The profit? I don't look at it from that perspective. So if you're doing add-ons, you could still be taking profit on those. Yeah, I'm taking the profit on the add-ons, right. Right. But it is, and again, this is the way Bill did it a lot of times. He would be selling his higher cost shares first. Usually that was last in, first out. But the way that he had accounting to his sheet was,

You know, the highest average, you know, the highest cost shares, that's what I got rid of first. Exactly. So I do the exact same thing, right? Because I only want the shares, the lowest cost shares to hold through. Yep. Okay. So let's maybe, oh, did you kind of finish up on this one? Yeah, that was it. I mean, we can see it here just on the weekly chart. Again, the 40-week moving average is right around 100. Yeah.

again, it's, it's pretty much the same. So that's going to be my absolutely break level. I actually don't think I'd have to go back and see where I purchased it. Cause I don't think I'm actually right at a hundred percent here. So I'll probably take games sooner. I'll have to go back and look at that. Cause like I said, I was late to this party, unfortunately. Yeah. And so, um, we could also take a look at, uh, Netflix. Uh, again, I do have a position in this, uh, myself still. Um, and the,

This is not my typical style, but I will say that my wife forced me to buy some down here. Oh, good for her. She saw the horrible earnings report and she's like, you know what? I think it's going to come back. And because that's not my style, I bought her a single share because that's all I could stomach. And then she was like, well, how are your stocks doing? Because mine's up 400%. And it's like, okay, well, yeah.

That's funny. But talk to us about, you know, again, this is... You look at the monthly chart, and, I mean, this is...

a phenomenal, phenomenal stock, but it's certainly been left for dead a number of times where, um, I mean, back here with the pricing, um, you know, there's their pricing change fiasco that, uh, business schools, you know, analyzed to this day. Uh, you had, you know, the big run-up in, in 2020 with COVID and then, uh, a big downturn here. So, uh, where, where are you getting into this one? Right. Well, I actually don't own this stock, but I, we're,

Since we went, we looked at the examples of Netflix previously, I thought it was interesting to look at it again because all those bases along the way, I mean, back from September 2022, you can actually see where a lot of the rules, the holding rules that we talked about from the bill examples previously are applied here in all these bases. So if you had got in at that first stage base in September of 2022, you

That first cup with handle base in March of 2023, you see you've got those below average volume bars as it corrected underneath the 10-week moving average. So this one's really just great to study. I mean, so again, I don't have it right now. I think it's still a hold if you own it because it's just correcting nicely. You've got the 10-week moving average that it still hasn't touched.

Now you are reaching a level at 1,000, a nice round number. So it could be time for it to base a little bit more. And, you know, for the most part, you also see here that it's held the 40-week line, except for a little bit there in September of 2023. But again, look at the volume when it was doing that in September of 2023. Very low volume. And then when it shot back up, the bar you just showed there,

I mean, that was a, that was accumulation week. So that was a week to get in actually. Um, if you were watching it closely and, and what is something that you were interested in. Very good. Now,

I got to kind of shift gears here to the fact that a lot of stocks recently have just skyrocketed in such an amazing way. And Applovin is probably one of the poster children for that. Applovin, of course, I'm going to change the date real quick because this is one of those examples where it just looks so condensed. I'm going to change the date back to September and

Actually, I'm going to go to September 11th. So this is where we really kind of saw a very dramatic turn in the market. I want to show what the NASDAQ was doing on that day. It was below the 50-day moving average line, but by the end of the day, it got above the 21-day moving average line. But on that day, Applovin was...

acting very different. It was acting stronger than the market. This was kind of your reverse canary in the coal mine, because instead of like the canary dying, it was like, oh, I'm puffing up. I'm like getting stronger. You know, it's like Tweety Bird back in the, you know, when he took that Jekyll and Hyde formula, if you watch the Looney Tunes cartoons. So a very strong day. And this

You know, just turned out to be the actual leader of this market. Go back. Don't leave yet. And go to the weekly, please. Okay. So I'm going to go back to September 11th, and we'll go to the weekly. So we've been calling all of these hold rules, but...

You don't have to be in the stock to apply these rules. These rules can also be used to be like, is this a good base? Is this base pulling back nicely? Is this a base I want to get into? Because look, I mean, it looks kind of scary maybe because it went all the way down to the 40 week moving average. But so did those examples we looked at earlier. And look at that volume. Justin, highlight there for the volume how below average volume it was there.

A little to the left right there. I mean, look at that. There's like no selling there.

You know, it's like you think it's selling because it's going down, but actually I don't think there is. And the proof's in the pudding, right? And we have those other examples to look at it. And we know already just based on what it was doing from the end of December 2022, it was already a leader in its own right and it just has kept going since. And you can actually look at that previous basis around $40, same thing. Look how the volume dried up as it was correcting. So-

These rules, I'm calling them holding rules, but they're really just chart reading skills to help you find strength and good quality bases that have a high potential to work. Yeah. So going to today and look, you know, I do have a position in this, but I got my position. I have one too. Make sure I say that.

I got my position really late. I was buying it off of this here. So I did some selling today, but I still hold a little bit in this. But I didn't go large because I knew I was getting this way late. So, I mean, again, this came out below $100, and I'm buying it just below $300. So talk to us about what you're looking at here. Well, let's go to the weekly. You know, I love those weeklies.

Yeah. So, I mean, I'm looking for it to hold the 10-week moving average. And I think that level that you drew is a good one, around 300. I think it needs to hold that. That was also a high-volume closed week and day. So that is a very important level we'll have to keep an eye on. So I'm in agreement with you on that. Okay. Okay.

Well, let's go to KVYO. We got to get a recent IPO in there before. Oh, yes. OK, absolutely. Because and again, for those that don't know, there's a lot of IPO studies that are done in that lifecycle trade book. Again, you guys do a lot of analysis of a lot of different IPOs. But just I'm going to go to the weekly. I'm going to, you know,

I'll head you off with the pass. I'm going to turn this back to standard because I have it on fast bit. I was like, that doesn't look right. It's a decent-looking pattern here. Yeah. So, you know, Kava was a recent IPO, too, but it's definitely securely in what we call the institutional advance phase. But it did have a similar institutional due diligence phase, which is what we call this area from the September 2023 to about –

Well, about to now, really. And then we've got the turbulent zone, which is the high of that first week bar. And it's past that now. And actually, it's kind of funny how market surge has shown it as a cup with handle. And it just got so tight in that handle. It just looked really good. And actually, that's where I was initially getting into it.

But then it had that earnings gap down, which is that right there, right? Where we were, you know, and interesting what we were just looking at, you know, big bar down, big volume to go with it. And then it recovered nicely. And I actually did sell it, though, because I didn't have as much of a cushion, right? We were talking about having that space in between the first cup and then the next space, which there wasn't. So I did go ahead and sell it, I think, for $1.

probably break even. And, but now I'm back in it, um, made another nice little base here and it's above the turbine zone. So I'm hoping this one will continue and turn into a nice, uh, institutional advanced phase like Kava. That would be ideal. Well,

Well, and I'm so glad that you went through this one because, again, you're not applying those same holding rules to this because, as you've said numerous times, it's once you have that space, once you have that cushion. And this, again, goes directly to what Bill O'Neill used to say. You trade differently when you have a cushion. You know, that's when you can get aggressive. That's when you can handle things differently. You can let it come in more because you've got that cushion. It changes everything. There you go.

Yeah. Well, hey, Kathy, it's always a pleasure having you on. I know I need to get out to Colorado again soon. I keep on promising that one of these times I'm out there, I'll see you. You'll just have to tell us where you are and then we'll come find you. Probably not going to happen right now because my wife is definitely allergic to cold. Oh, yeah, yeah. All right.

Not right now. Um, but, uh, yeah, so always a pleasure again. Uh, uh, I, I did notice in the YouTube comments, a few folks were saying, look, I, I went and bought that book, uh, the life cycle trade. So thank you. Certainly something that has a lot of great information. Um,

And again, you walk through the math, which is important. So people understand where you're coming from. And look, you don't have to use the same rules. You can use a different level of that mental capital preservation in terms of what works for you. But it certainly gives people a framework to use. Yeah, exactly. So yeah, I hope this was helpful for everybody. Again, if you don't want to hold like I hold, no problem. But these tools can still be used, again, for looking for great basis to buy things

And, you know, capitalizing on that next great big super growth stock. Yeah. And as you said, by doing those, doing that thinking ahead of time, you can really kind of save yourself a lot of those emotional decisions and stick to

to a lot more rules-based approach and have time for walks and bike rides. Exactly. Thanks so much, Kathy. Thank you. Also, as a reminder for folks, if you want to follow Kathy, she is at x at KGD underscore investor. So that's something that you can check out her feed. And also, I should mention that your colleague,

Eve Bobak, co-author, is going to be on IBD Live on Friday. So if you haven't gotten enough of the lifecycle trade, you guys can check us out on IBD Live at investors.com slash IBD Live for Eve Bobak's appearance. It's IPO sisters week. Yes, exactly. Well, thanks for coming on and have a happy holiday, Kathy. Thank you, you too.

Okay. That's going to wrap it up for us this week. Next week, hey, he's back, Arusha Paris from O'Neill Global Advisors, Portfolio Manager and Research Analyst over there, is going to be back to help us end the year, and we'll kind of go through the year in review. So hope you join us for that. Thanks for watching. We'll see you next time. Bye now. ADP imagines a world of work where smart machines become too smart. Copier, I need 15 copies of this. Printing. Ah!

By the way, irregardless, not a word, Janet. Yeah, I know. Page six should be regardless of or irrespective of. Just print them, please. If it were a word, Janet, it would mean without irregard, which is... Copier! Switch to silent mode. Let's put a pin in it. Anything can change the world of work. From HR to payroll, ADP helps businesses take on the next anything.