Here is a question we got:

I wouldn't mind hearing again the strategy on when to enter a stock. For example, say you put out "IBM long over 90" and the futures are up the next morning and we open up and IBM moves over 90 in the first 10 min of trading - do you enter then or typically wait for the open to settle out more? Also, let's say you get into IBM, it shoots up to 91.50, then falls back to 90.25 and seems to be using 90 as support - would you ever recommend selling at 91.50 then re-entering at 90.25 since it's still above the "get in" price? Or is it generally not worth it?

Thanks, J

Well, here is the deal. The first ten minutes of trading is a nightmare to get involved with. Thats not to say we dont do it some times, but more times than not a stock like that will power up, and then dip after the first several minutes of trading. What I like to do is see just where it got to on the initial bang. Let's say IBM opens at 90.10 and rockets up to 91.00 in the first several minutes of trading. Then as we approach 10 am, it starts fading off and by 10:15 its at 90.25. We might have jumped on it in the first several moments, but more times than not wed have sold once it started dumping. On days like that its often better to employ the ten am rule, or gap out rule.

That simply means we note that high of 91 and then watch the stock for the rest of the day. The minute it exceeds 91, chances are its going much higher and its safe to enter. Under 91 and its trapped in something of a no mans land. It might fade back down, it might break out, but its dangerous.

As far as buying that dip if indeed it does fade back to 90, and seems to use it as support, we do that sometimes, but it too is pretty risky. If we put the consider buy at over 90, and its at 90.15 after being up to 91, we might very well try it, but we would also be quick to bail if it fell much below 90. That would be a failed breakout and they can hurt you.

One thing that I must make clear here is this, We sometimes buy a stock, get shook out and rebuy it two or even three times when its hanging around a breakout level. If a stock is on our list as a consider buy over 90, and it opens at 89.80 we wait. Then it pokes over 90 and we jump on it at 90.05. It may go to 90.25 and then fade off. It might then lose 90. If it does we have our finger near the button. We can live with a small drop, say to 89.90, but if it fails the opening price, we are gone.

Now let's say later the same day it gets back to 90, will we buy it? Yup. The breakout is still alive, and we will take another shot. Ive seen days where we had to do it three times, taking a dime loss each time before the true breakout really took hold and up it went. Ive also seen the breakout fail and we ended up losing 50 cents on the day plus the commissions. Unfortunately thats the way this game goes sometimes.

There are no absolutes unfortunately. We have seen breakouts fail, weve seen reversals reverse again and press higher. Weve seen it all. The key is always the same, take small hits when something is going against you, and attempt to let it ride when its going with you. If you buy something because it crossed a breakout line and 20 minutes later youre underwater, dont be afraid to sell it out. Let's use some simple math here. Suppose you buy XYZ at 90.05 because its breaking out. It runs to 90.25 and starts to fade. If you dump out at 90.05, flat on the trade, what did you lose? A 20 dollar commission? Big deal.

Now suppose it fails 90 and goes to 89.90. So, you chicken out and sell. You lost 15 cents and your commissions. Still no big disaster. But what if you just held it, not wanting to get shaken out and two hours later youre down a buck and a half? Ouch. Now you could be talking serious buck depending on how many shares you bought. Dont be afraid to take the little hits, yeah they add up, but rarely as much as a trade gone completely sour. Id rather take two 15 or 20 cent hits and move on, than hope something back up and find myself down 2 bucks.

I hope that helps even though there is no easy answer. Those moments when a stock is hanging around a breakout can be tense, so you have to give it a little leeway, but dont let it get away from you. We push it once in a while and we get spanked when it goes wrong. The key is keeping the little hits little so when something breaks and runs for 3 bucks, you get it all back and then some. Thats how you win at this.