Q: In the Jan 9th edition of Tharp's thoughts, you explained that you don't like to buy stocks that have had previous highs above the current traded price. You showed an example of QCOM, where the prior high was back in 2001. I was surprised you made that comment when people like William O'Neill and Stan Weinstein talk about giving 2 years for the "over head supply" to subside. Is there any research you have done to demonstrate that belief? Are you basing your belief on experience and chart reading? I'm not sure where O'Neill or Weinstein came up with 2 years. I assume they have drawn their conclusions from just years of chart reading experience as well.

A: Your statement is a misinterpretation of what I said. First, I have the belief (and you can only trade your beliefs) that people tend to buy at or near the highs and hold on forever when the price goes down. While they are holding on, they keep saying to themselves, “if it just gets back to that price again, I’ll get out.” Of course, that varies from stock to stock according to the psychology of who is in the stock. However, I think it’s a good rule of thumb to believe that people will unload when the stock retests prior highs. Now what I said is that I look at the highs as a resistance point. We actually teach that in some of our workshops. From that resistance point you can determine your potential profit and compare that against the initial risk (R ) that you’ve set up. I like to see at least a 3R potential to take a trade. Does that mean that there is no chance that the stock will just blow by the old highs. No, not at all. It could easily do that. But I need some basis for estimating my potential risk to reward and that’s one of them.