Sunday, October 17, 2004

UCI gave technical warnings before the insurance scandal news broke


I shorted UCI at $32.84 in a trading contest on Thursday and I wanted to discuss the trade a little here.

UCI showed 3 out of the 10 signs to watch that your stock may be topping listed on pages 106 and 107 of the 3rd edition of William J. O'Neil's book "How to Make Money In Stocks".

1. Largest daily price run-up. If a stock's price is extended for many months (it's had a significant run-up from its buy point off of a sound and proper base) and closes for the day with a larger price increase than on any previous up days since the beginning of the whole move up, watch out! This usually occurs very close to a stock's peak, or top.

UCI had just such a day on the 2nd to last trading day in September.

2. Heaviest daily volume. The ultimate top might occur on the heaviest volume day since the beginning of the advance.

UCI had its biggest volume day since the beginning of it's advance on the 4th trading day of October, and it couldn't even make a new high!

5. Signs of distribution. After a long advance, heavy daily volume without further upside price progress signals distribution. Sell your stock before unsuspecting buyers are overwhelmed.

The volume of UCI was clearly larger during the beginning of October than at any other time during UCI's advance. The well defined resistance near $36 a share makes the distribution obvious.

It is interesting that UCI was flashing all of these sell signals in early October because on Thursday, the insurance industry scandal came to the surface. It is neat to see how the technicals tell the story before it gets to the public via the news media.

I'd like to close with a recontruction of a conversation with Jesse Livermore to his sons on the stock market on page 144 of Richard Smitten's book "Jesse Livermore: World's Greatest Stock Trader":

"There were other factors as well to mark the end of a major market move. There was usually heavy volume, but the prices stalled, they did not go up and make new highs on the leading stocks. There was no strong continuation of the current move. There was a clue, a warning. At the end of a market move it is usually pure distribution, as stocks go from strong hands to weak hands, from the professionals to the public. It is deceptive to the public who view this heavy volume as the mark of a vibrant, healthy market going through a normal correction, not a top or a bottom. I was always alert to look toward volume indications as a key signal at the end of a major move, either in the entire market, or an individual stock."

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