Author Archive for Jeff White

Insider Activity

August 13, 2007 at 10:27 am

One thing I get asked quite a bit about is insider activity. People want to know if a stock should move up on insider buying, or if it should go down on insider selling. Many will ignore perfectly good chart patterns if the insider activity doesn’t suit them, instead deferring to what company execs are doing over time rather than catch a swing trade for a multi-day move.

My personal stance on the topic is a simple one: I ignore it. Here are a few reasons why:

There are lots of reasons to sell. Maybe junior is going to college and a corporate executive wants to free up a little cash to pay tuition. Maybe they’re buying a summer home or a boat or a collector car. Maybe they’re even afraid their stock will go down. But don’t jump to the worst conclusion when you see insider selling, because you never know their motives. And even if insider buying is taking place, that sure doesn’t mean the stock will soon reflect that optimism. Corporate executives can and will be wrong often, so don’t bank on higher prices even if you see insider buying. They’re not the ones moving the stock anyway.

Good chart patterns should still play out. A bullish chart is based on recent supply & demand in the stock, so if the pattern confirms I’ll take that trade with managed risk. If it never confirms, I never take the trade and there’s no harm done. But what happens over time with insider activity isn’t what will drive the stock. Institutions (big funds) move the stocks, so if they’re accumulating or distributing stock, the chart will show it.

My timeframe is days, not quarters. Even if Joe Insider has been selling (or buying) shares for a while now, why would I care? Suppose it is based solely on where they think the company is headed, even if they’re correct it’s going to take lots of time to play out – usually several quarters at a minimum, and I’ll be long gone by then. Because stocks fluctuate, there will still be good moves taking place most likely in both directions, offering chart-based plays in the meantime for active traders like me.

Good trades still boil down to the charts and managing your risk. Don’t jump to any conclusions that a CEO or CFO is going to nail trades in their company’s stock. They aren’t traders, they’re businessmen! If you’re a short-term trader, insider activity should be the last thing on your list of things to consider before buying or selling any given stock.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

How Gaps Change Motivations in the Market

August 10, 2007 at 8:19 am

With so many gaps hitting the market in recent days, it’s the perfect time to discuss them a little bit. Not only are they occurring in individual stocks as a result of earnings announcements (which is typical and expected), but we’re seeing a lot of them in the market indexes with the recent news flow adding to the volatility. Of particular note is how many of them have filled.

Before I get to the heart of this article, let’s look at an example in case you’re not quite sure what I’m talking about. Here’s a look at a 5-minute chart of the NAZ on Thursday morning, which gapped down some 40 points from Wednesday’s closing levels. It ended up rallying back up to fill the gap soon afterward, and even turned positive for the day after about 90 minutes.

(Click for full-size image, courtesy of TeleChart)

The Mechanics of a Price Gap

So how do these price gaps even come about? Well, they occur from a buildup of orders overnight which create an imbalance between buyers and sellers. Market makers and NYSE specialists have to take the opposing side of the public’s orders (they buy when you sell and vice-versa), so to offset this risk they do it at higher or lower prices, depending on the imbalance. When the public is buying en masse, market-makers will sell but at higher levels. That’s how gaps are created.

Once they’re in place, the next question is how do they get filled? Well, since many of them lately are occurring on emotional reactions to the news flow, most of the traders who would act on the news are the ones creating the gaps. After their orders build up which create the gap to begin with, there are very few traders leftover placing subsequent orders in the same direction, thereby limiting the extent of any follow through. As a result, the path of least resistance shifts to the other direction, meaning the gap now has greater potential to fill.

Psychology’s Role in Gaps

On top of the mechanics of how the gaps are created and filled, there’s also a lot of psychology at work which is adding fuel to the fire. Traders who are already holding positions in the direction of the gap are greatly tempted to take those profits, which means on a gap up that they create selling pressure as they move to book gains. The overnight windfall of “free money” motivates them to ring the register, and that only accelerates how quickly the gap may fill, especially when combined with the natural mechanics of a gap. Additionally, downside gaps are often viewed by those with cash on hand as an irresistible sale, unable to pass up the thought of buying “cheap” stocks. Their buying, along with the covering of short sellers, drives prices higher to fill the gap.

There is never a shortage of interesting dynamics at work in the market, and price gaps are a study in the psychology which can help us learn a lot about why things move the way they do. If you catch a gap in your favor, play it close to the vest and squeeze out of it whatever you can, but if it begins to fill just remember how momentum is shifting and decide quickly whether you want to battle it or not.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

A Market for Spectating, Not Speculating

August 9, 2007 at 10:35 am

Boy, is this market crazy or what?

Just since yesterday afternoon, we’ve seen a huge rally, sharp selloff, steep bounce into the closing bell, giant gap down and an immediate big bounce. Stocks are literally all over the map!

It’s quite a show, and I’ll venture to say that most traders are better served spectating in this market than speculating. If you’re not nimble, it’s incredibly easy to get burned, because just like springtime weather, it can change quickly out of nowhere.

Stay careful out there, and don’t be shy about protecting that capital while these violent swings play out. We covered our lone overnight position in ESI this morning for a nice gain on the short side, but at the moment we’re sitting in cash at TheStockBandit.com. It has served us very well to stay cautious in recent weeks, but once things smooth out a bit we should see much better conditions for more aggressive trading. While you wait, enjoy your front row seat to the show and don’t succumb to the urge to overtrade this market!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

Conviction vs. Conditions

August 7, 2007 at 10:04 pm

I love trading with the wind at my back, so when the market is strong I’m a buyer, and when it’s weak I’m looking for short sales. In general, it serves me well to trade this way, but inevitably there are times when I wish I had thrown caution to the wind!

Take last week for example. VRTX was setting up with a very well-defined bull pennant pattern, but I was cautious with any bullish setup due to the overall market weakness. The environment was bearish, so even as I saw this bullish setup I wasn’t very interested. The pennant even formed on decreasing volume, which is exactly what I like to see with this pattern, and I still passed on it. Here’s a look at the chart I showed to members at TheStockBandit.com last week as a stock of interest, although it was never listed as a trade candidate:

(Click for full-size image, courtesy of TeleChart)

As fate would have it, VRTX took off and has still not looked back. Here’s how it looks after Tuesday’s bar:

(Click for full-size image, courtesy of TeleChart)

Each time I saw it hitting new highs intraday on Tuesday I felt pangs of regret and guilt for not being in the trade. As it climbed higher and higher, I felt more and more foolish for not having bought such a sound pattern! What was I thinking?

And then it hit me: that isn’t my trading style! Taking trades which fly in the face of general conditions isn’t what I’ve built a trading career on. Rare are the times that trades have paid me well when I did throw caution to the wind. Catching this trade would have meant bending my rules, and while that may have paid off for me this time, making a habit of it would no doubt prove costly.

And suddenly it was alright that the stock had taken off without me. After all, I don’t have to catch every single move, plus the reason I wasn’t in the stock to begin with was because I had followed my discipline – not because I ignored it. My game plan doesn’t involve swing trading strong stocks in a weak market, and VRTX fit that description. Particularly when market emotions are running high, I’ll defer to general conditions over my conviction on a given trade, and that has saved me many dollars over the years. I’ve missed out on the occasional strong move (like VRTX) as a result, but my discipline when things get ugly has allowed me to protect both my capital and my objectivity while others are losing theirs.

So while it can be at times frustrating to miss out on a great move, sticking with your game plan and letting your discipline guide you will over time pay off very nicely. The occasional stock will laugh in your face and you will at times feel crazy for having let it go without you, but good trading will involve missing out on some moves. Put the odds in your favor as often as possible, and only trade when the conditions suit your style.

I hope you’re trading well this week!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

Daaaa Bears

August 5, 2007 at 9:52 pm

Daaaa Bears.

Again.

Three straight weeks, and all of a sudden the bulls have gone from first to worst. Of course there’s only 3 camps out there (bears, bulls, and sideliners), but still, the pain level is increasing and bulls simply keep responding by raising more cash. Unloading shares. Joining the sideliners.

This remains a time to avoid the long side while the carnage continues, which means if you aren’t short selling stocks that cash is the next best alternative. You’ll have plenty of chances to buy once a real low is made, but so far this market is still searching for it. Of course there will be some lucky schmoes who happen to buy the lows (once they are seen), but rest assured it won’t be on their first attempt. And the charts aren’t showing us any reasons to think that time is here yet, so patience is a must at this point.

Perhaps the bulls will get some help this week from Bernanke & Crew, but even if they do, the key will be how a bounce is treated. If a bounce is produced, it’ll be difficult to trust for anything other than a quick pop, as all the others lately have been used for selling into. Either way, it should certainly be interesting! Be sure to check out this week’s Market View page over at TheStockBandit.com before you start your trading week for a closer look at the indexes and some chart comments.

If you’re a bull, remember that this too shall pass. But right now, the bears are growling and they deserve some r-e-s-p-e-c-t!

Trade well this week and stay patient out there!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

Not A Dip-Buyer’s Market

August 1, 2007 at 10:37 am

For the past year, every dip has been bought. Bulls have enjoyed a nice uptrend, and with each higher low their confidence reached higher levels. Anytime stocks have gone on sale (ie: come under pressure), the buyers have been there with wallets open ready to scoop up shares. And they’ve been compensated quite nicely for it, I might add!

But things have changed. Stocks have been punished lately, and the swagger of the bulls has disappeared. They’re not eager to provide support, and instead they seem to be getting more spooked. Dips have become all-out selloffs, and the buyers are nowhere to be found. In fact, even the bounces have been brief, as bulls become sellers and jump quickly to unload shares into any strength as they seek to raise cash levels. Concerns are running high.

As the major averages reach multi-month lows, it seems emotions are reaching new multi-month highs. And when emotions are playing an increased role by boosting volatility, trading can get a lot more complicated.

I’ve noticed lately that resistance levels are being respected much more than support zones, and that goes with the territory of a downtrend. Take the S&P 500 for example, as it undercut the 1485 area last week with ease (like it wasn’t there), but failed to reclaim it this week on the bounce attempt. The same level which was ignored to the downside was like a brick wall on the upside. As traders, we have to pay close attention to these kinds of things, or else it can cost us dearly. The dip-buying mentality which many have enjoyed for so long is simply not working right now. Key moving averages are being sliced as if they aren’t there, and that’s just one example of how the environment has changed. It’s time to adapt if you haven’t already.

So here’s the bottom line. Unless you’re a trader who’s very quick on the keys and can scalp effectively, or you’re willing to short sell this market, cash is the place to be! Don’t attempt to buy dips in a market like this until some stability is seen and the dust begins to settle. Once a new uptrend emerges, there will be plenty of opportunities to catch a ride, but you sure don’t want to be the first one to buy. Remember, the first person at a party has no fun.

Respect the current market weakness and live to trade another day!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

Showdown Shaping Up

July 29, 2007 at 7:38 pm

The bulls took another beating last week as they shed between 4 and 7% in the major averages. This puts the sellers in the driver’s seat right now, which means the bears are licking their chops. On the other hand, the bulls have their backs against the wall for the first time since the late-February tank-job, so they have their work cut out for them if they want to regain their edge. It should be quite a showdown if the buyers look to take a stand, as emotions are running high and bears are feeling good for the first time in a while.

It’s a tough time to initiate new shorts after last week’s carnage, but a relief rally could be a short-lived event if bulls become sellers at higher levels. Be sure to check out this week’s Market View page over at TheStockBandit.com before you start your trading week for a closer look at the indexes along with more of my comments. We moved to cash last Tuesday morning to let the market correct without us, but once the volatility settles down a bit in the coming days we’ll be looking to catch some great opportunities.

Trade well this week and stick to your plan!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]