Green Mountain Coffee (GMCR)- August 19, 2007
While fundamentals will ultimately dictate the price of a stock, understanding the short term influences on price movement can help the performance of even the best stock picker. Think about it. Let’s say you bought a stock at $20 because you liked the fundamentals; and then sold that stock at $30 when you felt the stock was fairly valued. That’s a nice 50% gain. But what if that same stock pulled back to an obvious prior support level of $19 after you bought it, and then advanced to an obvious resistance level at $32 before you sold it on a pullback to $30? If you had even a basic understanding of technical analysis, you might have caught most of that additional $3 move, which would equate to a gain of over 70% (using $19 as the cost basis). Now, nobody can catch the precise bottom or top of a move, but I think you get the point. Understanding basic chart analysis can really enhance your performance.
Let’s see how that plays out in this daily chart of Green Mountain Coffee (GMCR).
Notice how each breakout since May has pulled back to test the prior resistance level. Each time the stock broke above a prior high, a subsequent pullback to that same prior high sparked enough buying interest to halt the pullback. Those folks who missed the move were waiting with open arms for their second chance to buy, as were those disciplined traders who were waiting to buy on weakness.
How can you make this tendency work for you in GMCR? Well, let’s say you still like the fundamentals of GMCR. By using this tendency to pull back to test a breakout level, you’d see that the breakout at $32.50 has already been tested last weekyet the stock remains below the August high. So it’s really in “no man’s land” and is not at a good buy point. So the high probability move is to wait for yet another pullback to this prior support level before buying.
This pattern continues to repeat itself in GMCR. If you like this extremely volatile stock, wait for a better entry point before buying. You’re likely to get it. And try using the 50-day moving average as a reference for placing your stop. If that indicator breaks down, we’ll have a pretty good idea that the growth oriented traders are moving on.
For a more complete video analysis of this stock, click here.