That the market isn't rolling over amidst all the terrible news is positive. Yet the market is hostage to news headlines, creating a herky-jerky environment, even if it seems to want to move higher. If you think the market might move higher, even if for a very short while, perhaps it's worth taking a chance on a break out - if you are not faint of heart.
I recently took this chance on October 6, 2 days before IBD put the market in an uptrend. I did it because the market had shown a tremendous upside reversal on October 4 (see chart below - this day happens to mark the market's recent low point), and market rallies can be exceptionally strong, strong enough for a short swing trade. It isn't clear that the market today has as much upside potential as it did on October 4, however.
The market's move had a definitive nature to it on October 4 and, from my perspective, was worth attempting a trade in a break out stock. My stock of choice was Nuance Communications, NUAN, (and there were others). The green arrow marks my buy point from a cup with handle. The stock is currently forming a new base along its 50 day average.
Getting back to Dollar General, DG, you will notice that it formed a flat base, as outlined by the rectangular box, which it just broke out of today on volume that was 89% above average.
DG is an IBD 50 stock with strong earnings, and while its sales figures aren't stratospheric, it does have a 17% Return on Equity as reported by IBD, a key feature shared by past market leaders. An additional supportive feature is that it has been accumulated by some big funds lately including Berkshire Hathaway. Good to see the big boys supporting the stock.
But be forewarned: buying break outs in this environment is risky. A stop loss should be used, as always, but perhaps a tighter one than the usual 7% or 8% would be wise right now.
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