What a Short Squeeze Looks Like
February 27, 2006 at 10:30 pm
Short selling can generate some nice profits….quickly. Maybe that’s why the word short is used – because it can be such a quick trade.
I noticed OPMR this afternoon and cringed for those traders caught on the wrong side of a short squeeze. This stock had been moving steadily lower and had even confirmed a couple of chart patterns along the way. However, trying to swing trade a stock so badly beaten up on the short side can be tricky, so be sure that you pay attention when you’re short.
OPMR had been moving steadily lower before the trade got crowded and the path of least resistance suddenly changed.A short squeeze occurs when a downtrending stock suddenly catches a bid and begins to rise. The traders who have short positions begin to see their trading profits slip away, causing them to panic and buy to cover their shorts. This quickly pushes prices higher, and upside momentum replaces the downtrend due to the sudden burst of buying. One look at this 2-day chart of OPMR and it’s easy to see that plenty of traders got caught on the wrong side.
Once OPMR changed directions, it was smooth sailing to the upside with shorts covering for the past 2 days.Uptrending stocks will occasionally be met with a heavy dose of selling, seemingly out of nowhere. This is the same kind of behavior that leads to short squeezes, and is characterized by a large group of traders reacting to a shift in a stock’s direction.
Short selling is not a poor trading method, so there’s nothing to be afraid of. As long as you keep your stop loss in place and remain disciplined, you can avoid getting caught in a short squeeze. Just don’t ever underestimate the level of pain in a stock when you’re trading the short side, and be quick to take profits when the landscape begins to change!
Add another dimension to your trading and watch how I trade the short side with a 2-week FREE TRIAL to my stock newsletter.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Trading Without a Trend
February 22, 2006 at 5:19 pm
The Great Bear, Jesse Livermore, is credited with many trading axioms still used today. One such phrase certainly applies to the market we’re facing right now:
“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.”
Right now the Nasdaq and S&P 500 indexes (depending upon your timeframe) are stuck in trading ranges. Tonight the S&P 500 is facing a potential breakout, but we haven’t seen it yet. It truly is a market of stocks right now, which means there are some swing trading opportunities on both the long and short sides of the market. It’s a good idea here to focus on trading the best setups rather than insisting on forcing trades in any one direction. Do your homework, scan for chart patterns, and trade the best setups with great risk/reward profiles. Don’t marry an opinion tied to the bull or the bear side, but make your day’s pay by trading them both!
Find both long and short trading candidates in my stock newsletter and get a natural hedge in a choppy market!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Good Stuff from Gartman
February 21, 2006 at 12:34 pm
I believe we can learn a lot from other traders, and the mentality that keeps us willing to learn is the same one that allows us to take a small loss or book profit on the way up. We don’t need to be perfect in the trading business to do quite well! Having some trading rules in place sure can help, though.
Recently I ran across Dennis Gartman’s Rules of Trading, which I highly suggest you check out. Dennis a well-known trader and market analyst, and his rules can help any trader in any market.
My favorite rule of his?
“Do more of what is working and less of what is not working.”
Easy to remember and a great reminder to maximize winning trades and minimize the losses. Simple but not always easy!
What is your favorite trading rule?
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Day Trading Headlines
February 16, 2006 at 4:18 pm
Anytime headlines come out on a stock you’re trading, you’ll probably know it. Today I was long CHNR when a negative headline hit and this stock changed character quickly. When that happens, it’s best to remember the day trader’s motto: “sell now and ask questions later!” With commissions so cheap these days for direct access trading, it’s usually better to be safe than sorry when it comes to headlines.
I had highlighted CHNR as a long candidate in my stock newsletter last night with a buy point of $16.80. This momentum stock had settled into a powerful bull pennant pattern, and an upside breakout was the swing trading buy point.
Today, CHNR caught a bid during the morning and quickly advanced, hitting my buy point and moving higher by another 9.5% in just 2 hours time. With a nice profit on my screen in such a short amount of time, I took partial profits on the way up and had planned to ride the rest as a swing trade position.
During lunchtime, however, a headline hit the wires which was picked up by my news feed that CHNR would have to seek continued listing by filing a new listing application with Nasdaq. This was major news, and the stock began to react in a hurry. My ticker went solid red and I knew it was time to take my remaining profits now that the landscape had changed so drastically. While I don’t mind giving an active stock some room to move, it was the fact that a significant headline had come out that caused me to sell.
Keep a close eye on trades even when they are working! Don’t be afraid to take partial profits into unusual strength to book some gains, and be willing to walk away if fundamental news surfaces. The market doesn’t always act rationally, because traders will almost always sell now and ask questions later.
Jeff White
President, The Stock Bandit, Inc.
thestockbandit@thestockbandit.com
Still Ugly!
February 13, 2006 at 8:14 am
"Look away, I'm hideous!"
Back on December 6th, I gave a chart review of MOVI, which was a downtrending stock. The point of the article was to avoid downtrending stocks.
Although MOVI appeared “cheap” at that time, lower highs and lower lows were in place and there was no reason to believe that was about to change. Here’s a look at the chart I showed back in December:
MOVI continues to trend lower, and buying a “cheap” stock would have been costly!MOVI put in some horizontal price action following my post, but that was merely a pause in the poor action. Trends followed by horizontal price movement are often followed by more trending in the original direction, which is what MOVI is still doing.
MOVI is down another 40% since I reviewed it within its downtrend, which certainly counts as hideous!This stock is once again moving lower (down 40% since my review of it – ouchie!) and getting “cheaper” for those who believe in the stock’s fundamentals. Imagine their pain!
The moral of the story is still the same: stick with the technicals and avoid buying stocks in downtrends. Make sure that a stock you’re considering buying has some potential to rise in price and make a higher low and a higher high. Don’t let today’s prices compared to historical prices be your basis for buying a stock, because cheap stocks only seem to get cheaper. You’ll save yourself a lot of money and be able to focus on good opportunities instead of babysitting trades resulting from poor decisions.
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
It’s All About Personality
February 7, 2006 at 5:30 pm
Recently one of my subscribers emailed me a few charts for review. This particular trader wanted to know which stocks I would trade of the handful that he inquired about. I told him that although each of the stocks looked good in the short term, I didn’t like them all for trades.
Even if you have no personality, make sure you understand your stock's personality!
One thing I always try to consider when scanning stocks for chart patterns is to take a longer term look at the chart to review that stock’s trading history and personality. Is it prone to gaps? Does it seem to trend well? Does it follow through and make continuation moves or does it reverse out of nowhere? While a stock might have a very clean bull flag pattern or double top in place, it may have a history of ignoring such developments. Looking at factors like that helps me to decide if I think the most recent pattern is likely to develop into a good trade or not. Some stocks will set up good patterns but just might not have a history of really confirming them well, which will cause me to move on to the next setup on my list.
Chart reading isn’t a crystal ball, but it can sure give us a glimpse of how a stock usually moves. Taking a stock’s personality into account when contemplating a trade can sure help us determine more accurately how it may behave going forward. In the end, good trading is all about putting the best odds for success on our side, so trade the stocks with consistent personalities!
Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Watch Trades for Clues
February 6, 2006 at 8:50 am
Some trades are profitable while still offering us clues as to just how well they are working. While our primary objective is to turn a profit with our trades, it is certainly important to monitor the behavior of our trades to do our best to determine what we should expect going forward.
I highlighted SNDK in my stock newsletter on Wednesday night with lower highs in place and a bear flag pattern which had subsequently formed. The short selling entry point was a downside break of $66.00 at the lower line.
The following day, SNDK triggered and showed us $0.98 in profits. On Friday, it dropped another $0.97 for us, showing us a total profit per share of $1.95 from our short entry.
While I do like the fact that this short sale trade is working, I am a bit concerned by HOW it is working. Although beggars can’t be choosers, I would much prefer to have seen volume kick in with higher levels on Thursday or Friday to indicate intense selling in SNDK as it confirmed the bear flag. So far, we’ve gotten profits but it looks a bit iffy to me. As a result, I’ll plan to take partial profits to lighten up on shares in case this stock bounces. Doing so will prevent me from giving back full profits, while at the same time allowing me to stay in the trade if a larger move develops. Perhaps soon SNDK can find greater downside volume, but it’s important to operate with the facts we are given as traders, so I’m turning slightly cautious on this trade which is working but not technically sound.
Jeff White
President, The Stock Bandit, Inc.
thestockbandit@thestockbandit.com
