July 20, 2010 at 9:02 am | | Comments 0

Intraday Extremes Offer Big Opportunities

The old adage says to ‘buy low and sell high.’  That’s misinterpreted by most, as they tend to sell their strongest stocks when strength is still present or buy before corrections are completed.

To the inexperienced, it may look like the move is done, but often times is followed by an encore of sorts.  Timing is everything, indeed.

Extremes can really pay quite well.  When fear is at its highest, it’s a great time to get long.  And when everybody and their mom is making money, it’s certainly time to raise cash.  But for the sake of this post, I’m not talking about buying a “generational low” or calling a long-term top in the market.  In fact, I’m not even referring to the daily timeframe here.

I’m talking about how some of the best trades will happen at extremes…

…the kind which are found intraday.

Profit Where Others Fail to Look

Define it however you like, but at the heart of it, an extreme is approaching quickly whenever a move is unfolding at an unsustainable pace.

That might be a parabolic uptrend, or intraday capitulation. An extreme is a price spike which is showing exceptional momentum now, but the enthusiasm is beginning to fade, and soon there’s going to be a reactionary move.

That reactionary move is the one you and I can catch most often.  I say that because once we see a stock that’s really on the run, the odds are that the easy money has been made for that particular move.  Attempting to join the move means chasing price without a clear-cut exit plan, and that’s a huge no-no for any professional trader.  So, the reactionary move is the money train for those who missed the original move.

What’s so funny is that most traders see a huge intraday run and just know they missed it.  Don’t be as closed-minded as them.  They drool over what it would have been like to be on board, and fail to recognize the opportunity that’s about to unfold.  Dare I say, a more defined-risk opportunity.

You Missed the ‘Move’ – So What?

Take Monday for example.  Education stocks bolted higher in the morning, ripping through offers on the way up as they painted the tape bright green.  By the time most of us noticed them, they’d already put up very impressive gains.

Maybe you saw APOL, ESI, COCO, DV and others up in the neighborhood of 10% in just the opening few minutes.  It looked like they could keep going, but suddenly the buying frenzy morphed into profit-taking, and thus, opportunity arrived.

RIG provided an excellent move for me (from Sunday night’s premium newsletter), but my most profitable trade of the day actually came in a short sale of ESI.  Let’s take a look…

ESI ripped higher by $9 right off the open Monday, but I wasn’t long.  It was up about $6 by the time I noticed it, and I’m not a buyer of that kind of strength.  So instead, I waited for the enthusiasm to wane.  And shortly after, it did.

The stock had painted a high of $95.62, and then backed off slightly.  It spent several minutes consolidating, and then on the 3-minute chart I saw something noteworthy.  I shorted at $95.10, set a protective buy stop up above, and waited to see if profit-taking would develop.

An hour later, the stock was more than $6 lower, trading in the low $89’s, and I was out of the last of my shares (after scaling out).  It didn’t last long, but the overreaction on the upside was followed by a nice reaction on the downside, and that was the move that paid me.

Here’s a closer look:


Chart courtesy of Worden

I outline my entire method for trading these extreme reversals in my Advanced Trading Course, so the specific details are reserved for students, but I will give you a few general pointers here.

Profiting from extremes begins with a mindset shift.  When you see a giant move, don’t kick yourself for missing it.  Instead, start looking for a way to profit once it’s over.  Be creative – the market requires it!

Take note of intraday extremes.  Don’t chase them, just watch them.  See if the pace of the move begins to slow down, and at the first sign of a turn, you’ll know you’re looking at an opportunity.  They will not all pan out, but the risk/reward associated with them makes them well worth studying, and often times quite lucrative to trade.

Trade Like a Bandit!

Jeff White
Swing Trading & Day Trading Service

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