What would Jessie Livermore be buying if he were alive today? Follow up

This article serves as follow up to the November 2012 article which attempted to answer the question, what would Jessie Livermore be buying if he were alive today?

The November article concluded that Livermore would be long J&J Snack Foods Corp., and as the chart below shows, that would have been a profitable trade.

J&J Snack Foods stock spent more than 3 months in a tight sideways consolidation. However it eventually broke out through overhead resistance (circled), and made a sharp move up on expanding volume. After a short correction the stock then continued its advance.

A 6 month chart of J&J Snack Foods Corp. (Click on the chart for a larger version)

A 6 month chart of J&J Snack Foods Corp. (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

What else might Jessie Livermore be trading?

J&J Snack Foods was a perfect setup for Livermore, and because he was a trend following trader he would doubtless still be long the stock. The question is, what else might Jessie Livermore be trading?

To view the market through his eyes it’s important to continually assess general conditions.

As the chart below shows, both the S&P 500 and the FTSE 100 (shown in brown) have been in an uptrend since mid-November. General conditions therefore, still favor those who are long.

A 1 year daily chart of the S&P 500 + FTSE 100 (Click on the chart for a larger version)

A 1 year daily chart of the S&P 500 + FTSE 100 (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

As mentioned previously, Livermore liked to play stocks that were breaking out on increasing volume. Over the last few weeks a number of stocks have made such breakouts.

The first chart below shows Helmerich & Payne, a company that drills oil and gas wells for exploration and production companies, not that it’s relevant. Helmerich & Payne broke through previous overhead resistance (blue line) in late November and has continued to stair-step higher.

A 1 year daily chart of Helmerich & Payne Inc. (Click on the chart for a larger version)

A 1 year daily chart of Helmerich & Payne Inc. (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The next chart shows the recent breakout of Franklin Resources. Again the stock bumped up against overhead resistance a number of times before finally breaking out to new highs.

A 1 year daily chart of Franklin Resources (Click on the chart for a larger version)

A 1 year daily chart of Franklin Resources (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

News Corp. is another stock that has punched through resistance after several attempts.

A 1 year daily chart of News Corp. Ltd. (Click on the chart for a larger version)

A 1 year daily chart of News Corp. Ltd. (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

One final company that Livermore might well have brought is Coca-Cola Enterprises.

A 1 year daily chart of Coca-Cola Enterprises, Inc. (Click on the chart for a larger version)

A 1 year daily chart of Coca-Cola Enterprises, Inc. (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

All of these stock charts show similar price action. Having been in an uptrend, the price runs into an area overhead resistance where it becomes congested. After a period of sideways consolidation and multiple attempts to make a new high, the stock finally manages to breakout and begins a new uptrend.

These patterns follow the direction of the broad market and the breakout provides an entry point for stock operators like Livermore. The area just below the blue resistance line also provides a sensible level for a stop loss which will limit losses in the event of a false breakout or sudden reversal.

It is worth noting that none of these breakouts coincided with a particularly large increase in trading volume, however there are two things that may account for this. The first is many of the breakouts occurred during the Christmas holiday season, and the second is that trading volumes in general have been in decline since about mid-2009.

The bottom line

Trend following traders don’t care why a stock has moved, only that it has. There job is to recognize a trend and get onboard it. It also makes no difference to them if they are long or short, only that they are playing with the direction of the overall market, and they will stay long until the trend is broken.

As Jesse Livermore puts it, “There is only one side to the stock market; not the bull side or the bear side, but the right side.”

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