Typical Character Traits Of Strong Stocks

by Olivier on January 18, 2011

Just a quick stream of consciousness type of post for tonight. Talking about character traits that define strong stocks, here are a few questions that come to mind when I try to determine if a specific stock is indeed strong:

  • Does the stock ‘act right’?
  • Does the stock meet my expectations?
  • Does buying pullbacks get rewarded?
  • Does the stock make it easy for market participants on the sidelines to enter?

I could go on and on but that should be enough for starters. Let’s go through each of the points listed above.

Does the stock act right? This can easily be affirmed if a stock respects basic technical rules. If it forms a bullish flag it should break out without having the tendency to trap traders. Support should be respected and a stock should bounce off those levels without instilling too much doubt into those holding a position.

Does the stock meet my expectations? Whenever you buy stocks you typically have very specific expectations as far as future performance is concerned. Being flexible and not letting your opinions guide your trading decisions is the way to go. But that’s another story. So whenever a stock meets or ideally exceeds your expectations it is a sign of strength. Strong stocks tend to be extremely resilient and move way higher than you would typically expect.

Does buying pullbacks get rewarded? If you buy at support you typically act in a way most technicians would describe as sound trading. Strong stocks tend to reward this kind of behaviour.

Does the stock make it easy for market participants on the sidelines to enter? Windows of opportunity tend to close very fast with strong stocks. The more difficult it is to enter the stronger the buying pressure. Smart money typically doesn’t wait when an opportunity for a good entry presents itself.

Although this is very simple and basic stuff, it is important to constantly ask yourself these questions. Stay focused and be objective when it comes to analyzing the behaviour of each of your portfolio positions. This is something I addressed in the past when talking aboutassuming full responsibility.

All of the above applies to most of the Uranium stocks, and that especially includes both my Uranium portfolio positions. The overall behaviour of both DNN – Denison Mines and UEX.TO – UEX Corp. combines all of the character traits mentioned above. They act well, do what I would expect them to do and make it rather easy to hold on to my position without inflicting too much pain. Whenever all of the above mentioned happens, I have every reason to be bullish and stay bullish. As one of the best traders ever rightfully pointed out:

Be right and sit tight. – Jesse Livermore

A quick review of my portfolio positions:

  • DNN DML.TO – Denison Mines: My favourite pick in the Uranium realm. No headaches. A stock I feel comfortable riding all the way up as long as the up-trend in Uranium persists.
  • UEX.TO – UEX Corp.: I said it before. Athabasca basin. Best of breed. If uranium keeps going up this one will be a winner as they have the goods and great grades.
  • TMB.TO – Tembec: Stock is taking a much needed breather. I want to see how it handles the rejection from the 5$ level. If it can consolidate in a constructive manner I am willing to hold for higher price targets.
  • LNG – Cheniere Energy: Stock is doing exactly what I expect it to do. Technically speaking odds are high for LNG to hit 10$. If it acts right much higher price targets might be in the cards.
  • CNL.TO – Continental Gold: Stock is not meeting my expectations as it gave back almost all of its gains. This is all the more worrisome as the timing of my entry was decent. I then held on to it as it was clearly displaying winning stock characteristics. So I have no regrets as my job is to be extremely patient with my winners. Hindsight is always 20/20. CNL.TO is due for a bounce now. We have seen 10 days in a row of selling without any sign of resilience. I want to see if it can attract bargain hunters. Let’s see if it can indeed manage to bounce from here as sellers seem to be exhausted for now. Depending on how well it behaves I will decide if I keep my remaining position or if I sell and move on.

Sometimes you can observe a great deal just by looking. – Yogi Berra

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