Short Bases Have Long History of Failure, Look for Larger Bases
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Without a solid foundation, even the finest mansion stands on shaky grounds.
For much the same reason, investors should avoid buying rising stocks lacking proper bases. Otherwise, they could put their financial house in disorder.
In the current rally, scads of leading stocks have raced ahead like runaway trains. They haven’t given investors much of a chance to get on board.
Such pullbacks may seem like a good time to get into these stocks. But it’s a risky tactic.
In most cases, stocks should consolidate at least seven or eight weeks before breaking out. The only major exception is a flat base, which can take as little as five weeks.
These are bare minimums. Stocks can base for more than a year.
Stocks coming out of short consolidations are much more likely to blow up in your face. After a small run, they may retrace most or all of their gains.
If you buy a stock on the initial breakout, you might have a big enough profit cushion to ride out a correction. But from an extended buy point, a correcting stock can quickly put you more than 8% in the red before nearing its old base.
Always sell if you’re down 7% to 8% no matter what. Don’t compound a bad buying decision by letting your losses mount.
If you’re not fully invested by the time a market rally is in full swing, you may be too late. The stocks breaking out at this point, for example, are probably laggards.
Investing in such stocks lowers the odds of catching a big winner while raising the risk of picking losers.
Like farmers preparing for spring planting during winter, investors should get ready for the next rally during a market correction.
Keep a list of top-notch stocks. Insist on companies with superior share price and fundamental performance. They should be leaders in growing industries and enjoy support by mutual funds and other big institutional investors. These large institutions are the key to success. Have a plan, follow the plan.
The watch and wait. Once the market bottoms, pounce on your target stocks as they break out of sound bases on strong volume. Follow this formula and Insha Allah the reward will be handsome.
Remember what I have written many times. You must have a plan, a long term plan. Do your home work. Do research and research thoroughly.
Once your research has been completed and it meets all of your plans then go ahead and pull the trigger (invest). Once you invest with a plan, you will win but you must have solid plan and you must be patience.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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