Adding to CMI holding

We have two Buy signals that triggered this week in CMI. I will add 2/3 position based on a 20 WMA signal and Relative Strength breakout. We had seen this breakdown a couple weeks ago and we reduced our holding size to 1/3 as the confirmed Cup/Handle pattern was the only bullish signal that was valid. CMI appears to have given a nice shakeout move and is now retaking its prior uptrend. To be stated simply, we have confirmation of further strength present in the stock and therefore I will now be holding a full 3/3 position.

 Here we see price breaking back above the rising 20 WMA after temporarily failing 3 weeks ago and price is making new multi-week highs. This is what we look for as one of our signals of strength. Yes price has rallied hard in the past 2 weeks, and yes we might have ended up buying the highs. But typically this is not a sign of weakness, it is a sign of strength.

Most people have a misconception that you want to sell strength and buy weakness, which then logically follows that you sell your winners and buy your losers. But as legendary investor Peter Lynch says, "Selling winners and adding to losers, is like pulling the flowers and watering the weeds." I love this quote and I believe he is exactly correct. Most will not be willing to buy new highs and prefer to buy on weakness, some are very good at this, but often a breakdown leads to more weakness and a breakout leads to more strength. New highs most often lead to more new highs. 

Just personally I prefer to buy breakouts rather than pullbacks because of the simple fact that a breakout signal is black and white, pullbacks are not. On a breakout, price makes a new high...simple, obvious and shows tremendous strength. Buying a pullback, you are never sure if this is as far as the pullback will go, will this support hold, what do I do if it continues to weaken, etc. It just leaves a lot up to feelings and interpretation and often you are buying something that is weakening for a reason. If a stock is making new highs, it means there is huge demand for shares and the company is one if not the industry leader. When a stock is selling off it often means no one is willing to pay a higher price for shares, there is excess supply on the market, and/or the company is weakening fundamentally.

This is a personal preference, but for me and my simple view of the market, breakouts are crystal clear and show great strength which often leads to even higher prices.

After the big move down through the 20 WMA which also triggered a breakdown in the intermediate term RS trend support, price both nominally and relative has broken back above prior all-time highs and the 6-month downtrend in Relative Strength. We can see here where the RS trend failed recently and with the last 2 strong weeks, the price relative to the market is ready to resume its uptrend by breaking out convincingly this week.

It is often the case that a trend following trading system will be whip-sawed from time to time; Buys will signal at highs and Sells will signal at lows. But every signal needs to be obeyed because we simply do not know when the signal will lead to the next big move. You will occasionally be tossed a bit by the little waves, but when a big wave comes we will be able to ride it all the way in.