When we establish an initial Sell-Stop or Cover-Stop, we are looking for the most recent price resistance areas which
become evident by viewing a stock's Action History graph. These price
resistance points appear graphically as independent Hilltops (which can
serve as Cover-Stops for Short positions) or Valley-bottoms (which can serve
as Sell-Stops for Long positions). We illustrate these methods in the Action History
graphs for each position in our Portfolio, as we apply
them.
In order to identify the
true Hilltops and Valley-bottoms, we use the following rules of thumb. These are not
cast in stone, but as you study the action histories in our Portfolio, you will find we follow them pretty closely:
Rule #1 - Every real Hilltop is
preceded by a Valley-bottom. One can only determine a Hilltop
in hindsight. One needs to be able to visibly identify an ascent and descent.
To aid in this identification, we typically require a minimum of three
ascending closes after a Valley-bottom (to confirm the Valley-bottom), then we watch for the
peak of the Hilltop. After the peak, we require a minimum of three descending closes from
the peak as confirmation of the Hilltop.
Rule #2 - Every real Valley-bottom is
preceded by a Hilltop. Just like Rule #1 but upside down. One
must be able to visibly identify a descent and then an ascent. We require a
minimum of three descending closes after a Hilltop peak (to confirm the
Hilltop), then
we watch for the Valley-bottom to form. After the bottom, we require a minimum of three
ascending closes as confirmation of a Valley-bottom.
Rule #3 - If the most recent confirmed Hilltop has
formed below the 30 week Moving Average for a Short Position, use the 30 week
Moving Average as the Cover-Stop guide. When using the 30 week Moving
Average as a Cover-Stop guide, we always round up to the nearest whole dollar.
Rule #4 - If the most recent confirmed Valley-bottom
has formed above the 30 week Moving Average for a Long Position, use the 30
week Moving Average as the Sell-Stop guide. When using the 30 week Moving
Average as a Sell-Stop guide, we always round down to the nearest whole
dollar.
