How to Buy this Tech Stock

Gil Morales and Chris Kacher
Posted: Jul 22, 2012 12:01 AM

When the general markets are pulling back, and news headlines are shouting how bad things are in Europe, that the UK and much of Europe is in recession, the US economy is not showing signs of life, and Bernanke refuses to unleash QE3 (quantitative easing), it can be psychologically tough to hold a position. MLNX is one recent and highly educational example. MLNX recently pulled back to its 50-day moving average on higher than average volume. Some of our members held through and are enjoying today's big price gap to the upside of almost 40% (as of the time of this writing).

We have reported on MLNX as being actionable on the long side a number of times as it had a number of pocket pivots (see report archives here For those who used our 7-week rule (see FAQs for further information), they are still sitting in the position since MLNX violated its 10-day moving average on June 22, 2012, thus one would use a violation of the 50-day moving average as their sell stop. A violation occurs when the stock closes below the low of its moving average then moves below the low of that close. Thus, price/volume action using the 7-week rule, once again, has kept one in position.

MLNX Chart

MLNX data by YCharts

Most investors use the 7-8% stop loss rule as it tends to fit their risk tolerance levels, an important aspect to investing we have discussed in detail in reports and in the FAQs ( This rule applies only to where the stock was bought. As a winning stock climbs, it will most certainly have corrections beyond 7-8%. This is okay as long as its price/volume action continues to act constructively. This would mean employing selling strategies such as the 7-week rule to keep one in a winning stock for potentially weeks to months, capturing the 'fat' part of the price increase in the stock.

That said, being able to remain in a position even when it has a higher than average volume pullback, such as MLNX recently did down to its 50-day moving average, can be tough. What is helpful is knowing that had you bought at most of our suggested entry points, the pullback in MLNX to its 50-day moving average would still be at or above your buy point. MLNX then achieved support at its 50-day by bouncing off it yesterday on substantial volume.

In terms of whether to buy MLNX at today's opening price, it is a gap up indeed, but is an extended gap up, so it would be best to wait to see if it trades constructively over the ensuing days, enables one to buy a position that is not extended from the low of its gap up. We use an undercutting of the low of the stock's gap up as our typical sell stop, though we sometimes give the stock 2-3% room below the low of the gap up day, as it is contextual. As you can see after the April 19 gap up, the stock traded constructively sideways for a number of weeks, then gave a pocket pivot entry point on June 6, and then a number of other pocket pivot entry points, all of which we reported on in real-time to members.

Note, all stocks under consideration must display leading fundamental and technical characteristics before we will consider them actionable.