Tuesday, December 6, 2011

A "Lockout Rally" is a Sign of Strength

Before jumping in with both feet, one way to confirm that the market has indeed bottomed is to look for additional stocks setting up behind the first wave of emerging leaders. During the first few months of a new bull market you should see multiple waves of stocks emerging into new high ground, during which general market pullbacks will normally be contained to 3% to 5%.

Many inexperienced investors will be looking to buy a pullback, which rarely materializes during the initial leg of a new powerful bull market and from the onset may appear to be overbought.

Typically, the early phase of a move off an important bottom has the characteristics of a “lockout rally.” During this lockout period, investors wait for an opportunity to enter the market on a pullback, but that pullback never comes. Instead, demand is so strong that the market moves steadily higher, ignoring overbought readings. As a result, investors are essentially locked out of the market.


Click on image to enlarge

If the major market indexes ignore an overbought condition after a bear market decline and your list of leaders expands, it should be viewed as a sign of strength. In order to determine if the rally is real, up days should be accompanied by increased volume while down days or pullbacks have lower overall market volume. More importantly, the price action of leading stocks should be studied to determine if there are stocks emerging from sound, buyable bases.

Additional confirmation is when the list of stocks making new 52-week new highs outpaces the 52-week new low list and starts to expand significantly. At this point, you should raise your exposure in accordance with your trading criteria on a stock-by-stock basis. As the adage goes, "It's a market of stocks, not a stock market."

In the early stages of a market-bottom rally it's absolutely critical to focus on leading stocks if your goal is to latch onto big winners. Sometimes you will be early. Stick with a stop-loss discipline, and if the rally is for real, the majority of the leading stocks will hold up well and you will only have to make a few adjustments. However, if you get stopped out repeatedly, you may be too early.

Mark Minervini
Posted by at 12/06/2011 12:29:00 AM

1 comments:

  1. Mark, which is the stronger stock in general, a stock that breaks through a support level but then rapidly recovers, or a stock that never breaks the support line. Assume I am comparing two stocks over the same time period, and looking to go long. Any general rules based on your experience? Thanks.

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Specific Entry Point Analysis® - SEPA® was developed by Mark Minervini. The methodology’s foundation is built upon historical precedent analysis of past stock market “SUPER PERFORMERS.” To determine what characteristics make a stock likely to advance significantly, historical models of top price performers and industry leaders are archived in the Minervini confidential database. These models are based upon sets of characteristics prevalent in exceptional winning stocks.

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