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I’m often asked why I don’t always apply stochastics or MACD or moving averages to my charts. To that question, there’s a simple and a complicated answer. The simple answer is that I prefer to focus on price and volume. My charts are cleaner and I can focus on the real buying and selling forces that are at work in a market without confusion or obscuring the most important indicator - price. The complicated answer requires a closer look at indicators.

Knowledge is Power

Indicators can be useful, but the trader must know when to apply them in order to get something useful from them. Applying the wrong indicator will only cause confusion, and trading is hard enough without adding more doubt to the picture! I have witnessed a number of traders frustrated with getting stopped out of trades when trying to buy moving average crossovers during a choppy, range-bound market. Taking trading signals from indicators must be done with the proper market conditions for which those indicators were created.

For example, a stock may be about to penetrate a key moving average, but if the stock isn’t trending then most likely you’re taking a false signal, as moving averages are rarely helpful in a non-trending environment. By definition, a moving average measures something on the move. Therefore, they are best used in a trending market. On the contrary, a stock with momentum may have an overbought reading according to oscillators, but oscillators are rarely helpful in a trending market, as they can stay overbought or oversold for long periods of time. Oscillators are subsequently best used for range-bound stocks and markets.

Selecting Your Settings

When in doubt, I will on occasion look at a trending stock and apply a moving average. However, a quick look through any trading magazine will show you that there are very few moving average periods with a wide following. For this reason, I place little weight in arbitrary numbers like 25 or 40 period moving averages which a great many number of traders supposedly follow. A stroll through any trading floor will show you the wide variety of time periods being sampled for moving averages, all of which produce different values. The 50-day and the 200-day moving averages are probably the most widely watched, but they trail price so far that most of the time a stock is some distance from either of these two moving averages, diminishing the usefulness of either for a short-term trade on most occasions. When I want to see a moving average, I prefer to apply a faster one of 10-20 days(2-4 weeks), which will often give me a better glimpse of where a stock may find recent support or resistance.

A range-bound stock will generally ignore moving averages though, which is the time to apply an oscillator such as stochastics. Oscillators help identify reversal opportunities, and are therefore better applied to stocks or markets which are stuck in trading ranges for a fade play. Anticipating reversals within trading ranges or channels is a trading style which can benefit from overbought or oversold levels as measured by oscillators, so consider these tools the next time you are contemplating an entry in such a trade.

Keep The Main Thing The Main Thing

At the end of the day, price is the most important element in any trade, and no indicator is the magic bullet that your trading has been lacking. Price is the sole indicator which is telling you right now whether you are right (profitable) or wrong (losing), and it doesn’t get any simpler than that. When you need a little extra help determining entries or exits, be sure to consider which indicator best fits the price action in question before you apply all that are available to a chart. Only then will you find value rather than confusion in the additional information that indicators can provide.

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

Technorati Tags: Stock Market, Day Trading, Stock Trading, Investing, Swing Trading

Last week’s market pullback after a very long upside run might have been a change of character. In fact, with Friday’s bounce now having failed, the charts are suggesting some further downside may be in store. When considering the psychological changes that can come with a sudden, sharp correction after such a steady uptrend, there just might be a shift to a more defensive posture by the longer-term players. Bulls with nice gains to protect sometimes view subsequent bounces as second-chance selling opportunities, which can certainly have a slowing effect on the advance, and Tuesday’s turnaround is in line with that. Further, the bears who have been waiting so patiently might now begin to view this recent market weakness as an opportunity.

I’m no perma-bull or bear, I simply let the charts be my guide when it comes to trading the long or short side of the market. However, there are a few things I’ll point out when it comes to finding short sale candidates after a big advance like we’ve had.

It’s important to note that although trading the short side is technically just the reverse order of a long-side trade (with a short sale you sell first and buy back later), in practice it can play out very differently. We’ve already discussed how to get short, but let’s examine 4 related and important characteristics when locating high-probability short selling candidates, just in case this market is undergoing a change of character.

Volume. Trading the short side presents a completely different animal than the long side when it comes to trading volume. To move higher, a stock needs strong volume with new buyers entering the picture to produce greater demand on the shares, so long-sided trades should show improved relative volume. On the flip side, stocks don’t need high volume to move lower. In a skittish market, buyers who are bidding for shares may simply cancel their orders. That means that volume can actually diminish while the supply vs. demand relationship changes. The “heavy” supply in relation to the lighter demand is what leads to the phrase, “stocks can fall of their own weight.”

Chart Patterns. There are a number of bearish chart patterns which represent the psychology of buyers and sellers, helping to provide an edge on the short side when they surface. Being able to locate and correctly diagnose these patterns will help you locate higher-probability trades than arbitrarily deciding that a given stock “looks expensive.”

Failing Bounces. The description speaks for itself, but a failing bounce occurs when a stock has corrected, is trying to recover or “bounce”, and it becomes apparent that the upside momentum will fall short of reaching the previous peak. Initiating a short sale into a failing bounce can present a clear-cut exit (buy to cover at the previous high) as well as a nice entry for when the next wave of selling hits the stock.

Lower Highs. Failing bounces lead to lower highs on the charts, so having a few already in place should mean a downtrend is being established. Each time a stock attempts to recover, it comes under selling pressure again as weak holders unload shares in an effort to raise cash. Lower highs increase the odds of success when trading the short side, implying that the stock has already “topped out.”

Trading the short side can provide you with some nice profits when done properly, and also can be a nice natural hedge against long positions when corrections come. The market isn’t always in bull mode, so keep an open mind to the short side and one of these days you may be glad you did!

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

Technorati Tags: Stock Market, Day Trading, Stock Trading, Investing, Swing Trading

As a chart pattern trader, it’s all about the price action for me. My research isn’t based on company fundamentals or what some analyst is predicting for the next year - it’s based solely on supply and demand as reflected in the chart.

I trade common patterns like flags, pennants and triangles, all of which provide continuation plays within uptrends like we’re seeing right now. The patterns themselves present clear-cut entry and exit levels for my trades, so identifying them is certainly a key part of my method.

However, once I’ve identified a technical setup that I like, my focus then turns to the price action within the pattern. Doing this gives me a much better indication of just how antsy the stock is getting. Watching support and resistance levels within the pattern gives me these clues. A stock which is itching to break out is going to be perking up to test resistance, while one which is acting sluggish will generally be hovering at support.

An example of this can be seen in AMZN, a stock we just closed out Wednesday at TheStockBandit.com. We caught 5% at the first target on the first day, and 11% at the final target on the 3rd day. It was a great pop, but let’s look at how the setup developed.

I first listed AMZN in the Bandit Broadcast stock newsletter on May 3rd as it started to create a nice base following the run it made on the earnings announcement. This implied another wave of buying, so I set it up as a swing trading candidate for members. Here’s the chart I showed that night:

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

The stock didn’t break out for a few days so I highlighted it again to provide an update on how it was progressing. Again I stressed waiting for the buy point before entering, which serves as our confirmation that the stock is headed in the anticipated direction. Here’s the chart I showed May 7th:

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

A week later, AMZN was trading in a channel pattern, which would ultimately serve as a nice launching pad for another upside move if resistance could be cleared. Here’s the chart from May 14th:

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

The final indication came when AMZN started to turn up late last week, and you’ll see in the chart below how it moved to the top end of the channel before finally breaking out on Monday when we got our buy signal as AMZN finally hit our trigger price at $63.85. We took partial profits on Monday into the initial move, held it 2 nights and took the rest Wednesday at $71.00 (11%). Pretty nice for a 3-day trade. Here’s the chart at the time of our exit, looking a bit short-term extended and due for a rest:

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

So the next time you spot a nice chart pattern, remember to measure how well the stock is acting within the pattern. It might indicate that more patience is required before your buy signal is triggered, but once it perks up you’ll know the time is getting close.

And patience pays!

Jeff White
President, The Stock Bandit, Inc.
Take the Money and Run!
www.TheStockBandit.com

Technorati Tags: Stock Market, Day Trading, Stock Trading, Investing, Swing Trading

Most of us use bar charts or candlestick charts, but you don’t see a lot of line charts these days. The reason why is that a line chart is generally drawn using only the closing level of a stock, so it paints the end result and leaves out a lot of the “noise” along the way.

Line charts do have their place in trading, and I’ll give you a good example of a time when I use them. I look through a ton of charts every night, and you might too. What you find when you do that is that you’ll run across stocks which just give you the feeling that they’re about to move a certain way. Typically, I’ll draw trend lines and look for well-defined chart patterns to provide entry and exit levels for new trades. However, some charts just aren’t clean enough to do that effectively, so I’ll switch over from a bar chart to a line chart.

Let’s look at an example of this.

MVIS is in an uptrend, and one look at this bar chart does show higher lows along the way. The problem is, the past 15 bars or so are in sort of a messy area, making it hard to determine a precise entry and exit level without giving the stock too much room. (Click the chart below for full size)

Chart Courtesy of TeleChart.

So MVIS looks good for some upside, but we can’t find an exact entry. Switch over to a line chart format and it’s amazing how much cleaner the stock looks now. We have a nice base here with this descending channel pattern, giving us a well-defined entry level and exit level (above and below the channel, respectively). (Click the chart below for full size)

Chart Courtesy of TeleChart.

The next time you have that gut feel that a stock might be gearing up for a move but you can’t pick a good spot to structure your trade, try a line chart. You’ll find the levels will often be much cleaner, and you’ll trade more effectively because of it.

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

Every stock moves differently than the next, and a big part of trading well includes matching your personality with the personalities of the stocks you trade.

After all, if you’re an impatient type-A person, you’re probably not trading MSFT because the thing moves so slowly. On the other hand, you may like the slow and steady type of stock because it fits your trading timeframe.

If the latter describes you and you’re a patient trader, check out IACI. It’s been in a steady uptrend for many months now, and it’s just now trying to break out of a bullish ascending triangle pattern. That should spell upside continuation for the stock if the pattern is confirmed. I see an earnings date set for 2/8/07, and I would be out of this trade by then as that could have a big impact on this stock one way or another. Here’s a look at the chart:

(Click for full size.) Chart Courtesy of TeleChart.

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com