Known for manufacturing specialized hydraulic machinery, including materials handling equipment and elevating work platforms, JLG Industries was one of several stocks to buy before it was acquired by Oshkosh Corp. in 2006.
Here's the investment scenario that takes place in the mid-1990s: Return on equity is 22.4% for the fiscal year that ended in July 1994, long before the first buy after a breakout in 1995 (see cup-with-handle base). The investment banker is Raymond James and Associates.
By the end of November 1995, your stock is up from your first buy at $11 to $28 (both prices split-adjusted). You're way ahead since you added smaller amounts. You kept your average cost relatively low so you can afford to give your stock more room, especially since the last two earnings and sales quarters accelerated.
The next week, the stock has its first 20% correction and shakeout that you sit through as JLG never finishes a week below its 10-week moving average. It rallies back to $28 and then $30.
Now it starts another correction. Here is where your chart reading skills keep you on track. You see the first three weeks of correction are on much less volume than average.
Stocks To Buy: Where Volume Comes Into Play
The volume on the first week to close below the 10-week line is more important than the volume a few weeks later. The fourth week is on big volume with the week's price closing up. So you sit through the normal five-week correction.
It only takes one big winner handled properly, following time-tested proven rules, to offset the numerous other normal mistakes. JLG rallies for three weeks, giving you a new buy point when another big earnings report comes out, the third in a row that shows earnings and sales growth acceleration.
You add to your position over $30. At the end of eight weeks, JLG is now at $47 and you have the edge to decide to sell if either a correct climax top or upper channel-line rule violation happens.
Since the channel line has not been a sufficient number of weeks and a climax week must have the widest spread for the week since the original buy point, you don't have a valid climax top yet. So you sit tight and sell when a proper climax shows up a few weeks later.
This is all about correct money management and following sound rules rather than personal opinions, emotions or being lazy and not doing any homework but just hoping to get lucky.
This column originally ran in Investor's Business Daily as part of a 2012-14 series on America's greatest stock opportunities written by IBD's founder, the late William J. O'Neil. See more stories in this series.
