There is one stock that I have been trading in the past months that has behaved very good from a bullish perspective in the previous weeks while the American market fell five percent.
While Nasdaq fell that five percent the first days of January, the stock managed to rise five percent reaching a new maximum.
Darvas Boxes example
This stock is Allergan, which might not be the best stock in the American market, but it is one of the best in the year 2014 (not counting penny stocks obviously), rising more than 90% that year.
Allergan is the company that makes the well known botox, besides more products.
The meteoric rise of this stock in 2014 was consequence of the fight to take over this company by many competitors. It had to reject a few offers before being bought by another giant, Actavis. In the middle of that war there was a very interesting bull market.
In my case, I just needed to have a look to the last months chart to notice that there was a great interest in that stock, and decided to buy it in the last October, when it broke an important “box” or range, at 185.
From then on, the price did not stop rising, confirming what I saw, then Actavis bought it. After that last rise, the stock had been trading in a small range of +- 4.5% before it broke up again a few days ago to start trading at a maximum price again.
This is the type of stock people should look for. However, the best moment to trade it was in spring 2014.
Darvas Box Theory
I did start trading it later, and I could not avoid having the eternal doubts: “How am I going to buy here if the stock has already risen a 70% this year?” or “This cannot raise more, it is too high”.
But, in the end, the best is to follow the ticker. If the ticker says “up” we should be bullish. We simply place our stop order and place ourselves at the side of the main trend.
In April 2014 there was an important test of the 2013 maximum.
When you see something like it – a stock trading near its historic maximums – we should not doubt and trade the long side.
Then, there was the confirmation this stock was being bought by “strong hands” and there was a major breakout in the end of April when the stock rose 40% in two days.
At that moment the stock stayed in a flat market for four months in what we could consider a basic example of Darvas boxes, which would form for a while after big rises in his favorite stocks.
Darvas Box stop loss
Darvas would hold the stock and would place a stop loss order just below the lowest price of the range, which in the case of Allergan was $150.
In case the stop was violated, Darvas would insist for a couple of times before giving up. In the case of Allergan, the $150 price was tested in August, before the stock exploded a 30% more until where it is today.
I do not know where this stock is going. The bull market will have to end some day, but for the moment, the ticker says clearly that it is up.
The last two months it was trading in a small range between 205 and 214. Therefore, the interesting stop here would be below 205.
What is clear is that when the bear market in the general market arrives, no stock will avoid taking a hit.
This is one example that shows us that the best way to trade stocks in the long side is to buy the strongest stocks.
Darvas Box stocks
It is possible that in this case, the bullish potential is finished, but there are dozens and hundreds of stocks like this in the World markets. At least if there is not a major World recession like 2008.
If we investigate stocks like this, we will always find nice opportunities. As I just said, there are more, and even better stocks than this.
Although we should never forget that besides bullish trends, there are also crashes and big gaps in the downside.
That is why it is always good having a good portfolio of diversified stocks or assets, so if there is a strong and unexpected move in one of them, and against us, our overall account does not suffer too much.
Thanks for reading and sharing.