When Character Changes
October 23, 2007 at 7:34 am
Anytime we see a big contra-trend move like we got last Friday, the discussions begin….
Was it the end of the trend? Is this just another dip to be bought? Is the world ending?
Those questions arise for the overall market, but also for individual stocks. In reference to the stocks, the answer to all 3 questions is yes, depending of course on the stock in question.
Whenever I am considering whether a dip is buyable, the most important aspect of the stock to evaluate is whether the character has completely changed or not. Some stocks go through a minor character change when they see a minor dip in the midst of a strong uptrend, but others will reverse course sharply and never look back. The latter kind is what I want to avoid like the plague!
As you begin to work your watch list and seek out potential long-sided plays in the days ahead, take careful note of just how intense the dips are. Doing so will greatly assist you in deciding whether a buy is warranted, or if instead you need to keep waiting for a better opportunity.
Let’s look at a couple of examples.
MMM was trending nicely higher recently, climbing and basing on the way up in a healthy fashion. This stock’s ability to put in rest helped it keep climbing without getting too extended. A couple of weeks ago, MMM began to pull back gradually, but the uptrend was still intact. This stock actually had found support just above an old base, but then came Friday’s sharp move lower on heavy volume. The big spike down was followed by more weakness on Monday, and needless to say this chart no longer resembles an uptrend. As a result, I’ll avoid buying anything that looks like this.
(Click for full-size image, courtesy of TeleChart)
NUAN has been trending higher the past few months, and this stock also recently began a pullback. It also took a dip on Friday (and Monday temporarily), but the character of the stock was not affected. The pace of the pullback has remained constant, as is evident by the trend line just overhead. This is the kind of setup which I would consider putting on watch for a potential long-sided play once things shape up (and if it could clear the trend line). Stocks which may be impacted by widespread selling pressure but which still hold up relatively well are the only stocks worth looking at once the storm passes.
(Click for full-size image, courtesy of TeleChart)
Be careful out there with new buys, and pay close attention to the character of your stocks! If the intensity of their pullbacks worsen considerably, cross them off your list of buy candidates and move on to the next good setup.
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]
When Good Trades Go Bad
October 22, 2007 at 6:25 am
Last week, the market took a turn for the worse. A move like we saw on Friday inevitably leaves more than a few traders caught off guard as they watch profits evaporate and losses escalate. Take for example the energy sector, which has been such a leadership group for many months. Numerous stocks within the group took quick dives after making 52-week and, in some cases, all-time highs. This likely left many traders scrambling to make a decision – sell or hold?
Many traders tend to gravitate to the strongest sectors and the strongest stocks within those sectors for trading. This is a good approach to trend-following, but what happens when a move like last week comes around and you get smoked? A reader e-mailed me over the weekend with valid questions about this very topic. Here were a few of my solutions. My answers were applied to the energy sector which this trader has been playing, but it applies across the board to those individual trades which sometimes just turn and misbehave.
When a trade goes bad, cutting losing positions has several benefits.
For one, it will free up cash which can be used for other trading ideas. If your capital is tied up in a trade in which you are wrong (losing), you are suffering opportunity losses. A cash position is better than a losing position (and cash IS a position). Other stocks could be showing you a gain, so consider at least partial sales to free up cash for new ideas, possibly even on the flip side.
Secondly, selling or lightening up on losing positions will help to free up your mind and help you start fresh. Leaving some mental baggage behind is always a good idea – none of us want it! Some of my worst stretches of trading were a result of having just one losing trade on my screen which I should have already kicked to the curb. I would turn my screens on in the morning and there it was looking back at me. This not only put me in a poor frame of mind to begin the day, but it had effects on other trade ideas I should have taken but was afraid to put on because I didn’t want to lose any more. A losing position should be cut down in size at a minimum, and often times should be cut completely. Starting fresh allows you to get back to your big-picture game plan of taking trades in good setups without the mental baggage of big, ugly losers which weigh down your confidence.
Finally, a losing position should be cut because you are flat out wrong. Naturally, stopping the loss will save your hide! Some traders refer to losing positions as “paper losses” and convince themselves of the old argument that “it’s not a loss until you take it.” This could not be further from reality, because the damage has already been done. The market is telling you what the stock is currently worth. Take some responsibility – those red numbers mean you’re on the wrong side and it’s time to get out and stop the pain.
So the next time your stocks take an ugly turn, remember to at least lighten up on your position. You’ll reap a number of benefits and immediately feel better about your next trade!
Don’t let a losing trade turn you into a loser!
10/24 UPDATE: Jonathan over at A Trade A Day expanded on this concept and has made some excellent points along these lines. Check it out.
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]
Breather Becomes a Beating
October 21, 2007 at 10:38 pm
Last week I mentioned that the bulls were taking a breather, but the weak-to-choppy price action turned decisively sour on Friday as the selling intensified and the bulls got hammered to the tune of 2.5% or more across the board.
Obviously this implies more weakness in the short term and the need for further resting action before the buyers get back in gear, so the key at this point becomes capital preservation. Trying to catch this dip can mean getting your head handed to you, so be patient with new buys if you venture into the market on the long side. Then again, as individual traders we have the luxury of waiting for things to stabilize before buying again, so embrace that advantage. The big funds simply don’t have our agility.
As your trading week begins, 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 which were posted this evening.
Trade well this week and always protect your precious trading capital!
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]
Earnings Are Tricky
October 18, 2007 at 11:10 am
The mother of momentum stocks is set to report earnings tonight, and I have no doubt that GOOG will shake and bake one way or another after the news is out. With the odds of a large gap tomorrow morning in the stock, the allure is there for some fast profits on either the long or short side.
On that note, I know that some of you feel compelled to satisfy your craving for risk. If that’s the case with GOOG, then let me encourage you to define your risk and limit your downside exposure through a call or put purchase. If you absolutely can’t stand to pass up the gamble opportunity, then at least you’ll know what the worst-case scenario will be in case you’re wrong.
Personally, I like to save money and confusion by avoiding earnings plays. That might not sound very exciting, but I’m not a trader for the excitement. I like making steady profits with consistency, not roller-coaster emotional swings betting on coin-toss earnings reports and hoping to be right.
They’re just too tricky to play! Not only do you have the reaction to the top-line number, but soon after there is a reaction to the conference call & any guidance that may be offered. Don’t forget that expectations going into the report play a huge part in how the news is accepted, and someone’s sure to be disappointed or surprised. In addition, there are far fewer traders in the after-hours trading session, which means less liquidity. That’s a really bad thing when you discover you’re wrong and need out of a trade!
Best bet: stay away from earnings and let the amateurs duke it out. Instead, find the chart patterns you like and trade them. Exploit your edge over time for profits, and don’t worry about the gambles for the sake of excitement.
Trade with discipline!
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]
Time For A Top?
October 16, 2007 at 6:09 am
So, is it time for a market top? Is this the start of the big one? Has the run ended and now the only place to go is straight back down?
Honestly, I don’t think so yet. I’m never one to make predictions, but let’s hash this out for a bit and see what kind of logic we can come up with.
First, the case for the bulls. They have the momentum, the charts and new highs. That might not sound like a ton, but in this game momentum is everything. With higher highs in place, uptrends intact, prices well above key moving averages, and buyers oozing with confidence, the bulls could hang around for a while before they feel compelled to really raise excessive cash. Although they might stumble a bit by way of profit-taking, some major changes are going to need to occur before they actually break a leg and fall, and I’ll be keying off the charts to make that determination.
Now, the case for the bears. I could simply say “China” here and that would be enough I know, but that’s not all there is to the story. Obviously, stocks with virtually any ties to the Far East (including their names alone) have made incredible runs, as have the solar stocks. In fact, speculation has run rampant in a great number of the smaller stocks, which in itself tends to raise some eyebrows from traders who know that they can’t provide leadership for a lasting run. We also have a bull market which just turned 5, so there are plenty who can argue that perhaps the advance is getting a bit long in the tooth. Furthermore, there’s the debt crisis, economic concerns, and a host of other fear factors which are pointed to regularly as potential causes for meltdown. At the end of the day though, these are simply arguments which I should note that the market is largely shrugging off.
The verdict? Of course the market always has the final say, and I will definitely defer to the price action when it comes to my trading decisions, but I’ve gotta go with the bulls based on the limited evidence we have of the selling we’ve seen in recent days. We’ve seen some distribution taking place, but so far no major technical damage has been done, and everyone can agree that even strong trends have bouts of profit-taking (just as downtrends have bounces) along the way. Will we go up forever? No, there will be bear markets in the future. I simply am not convinced that the past few days of selling is marking the beginning of a new bear market, as there’s no technical reason to call for an end of the trend.
Earnings season is just getting underway, and that could certainly have an impact on not only prices but market psychology as well, impacting the motives of both bulls and bears alike. Ultimately though, price has the final say and right now the long-term and intermediate-term trends are pointing up, in spite of some short-term profit-taking.
I believe prices simply got too extended in the short term and that some profit-taking is warranted. At TheStockBandit.com, we moved to cash last Wednesday and are letting this corrective price action play out without us while we wait for new bases to build. We’ll be looking to get active again before long, but for now the market weakness is causing us no pain.
Stay vigilant with your trading capital and don’t simply throw caution to the wind. Respect the pullback. Be wise in not only cutting losses quickly but also in booking profits along the way. If you’re playing the momentum game, be careful and keep one finger on the eject button. Let the charts guide your decisions, from entries to exits, and as long as you do that, you shouldn’t even be concerned which direction things go from here.
Trade well 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]
Bulls Taking A Breather
October 14, 2007 at 5:08 pm
The bulls posted another gain last week, but overall they’re allowing the major averages to put in some needed rest. Last Thursday’s intraday reversal to the downside caught many traders offguard, but it’s action like that which will ultimately allow the charts of individual stocks to begin building new bases and not get too extended to the upside.
This week should be interesting as we wait to see how much more rest the market can get while the focus begins to shift slightly from such an economy-sensitive environment to the action in individual stocks. We have earnings season really starting to get underway, so be sure to keep an eye on the earnings calendar so that you can avoid any surprises in stocks you might hold.
Also, 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 which were posted this evening. This info is provided every night for members at TheStockBandit.com along with individual stock plays, but the market commentary is posted on Sundays as a free resource for those of you who may be interested.
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]
Sluggish Breakouts Can’t Be Trusted
October 9, 2007 at 7:16 am
I love to trade breakouts, and we’re seeing a lot of them in the current market environment. Many stocks have rallied back up near their summer highs, built new bases, and are starting to move higher once again. In general, there has been no shortage of breakout candidates in recent weeks, and if the bulls keep running then we’ll only see more in the coming weeks.
I’ve talked before about gauging the character of how a stock moves, and that certainly holds true on breakout plays. Ignoring things like weak volume on a breakout, late-day selling to come down from the highs, or simply the way a stock might clear resistance and yawn, are all ways to deny an underlying lack of strength which should really be monitored closely.
Let’s look at an example. Last week, I really liked the setup in SYNO. The stock had been in rally mode for a few weeks, and more recently had settled into a nice consolidation phase to digest the gains of the past few weeks. As the stock rested, it built a well-defined bullish pattern in the form of an ascending triangle. Volume had slowed during the rest phase, and I set up a trade to go long once resistance was cleared. My buy point was $23.25 as the upper horizontal trend line was cleared. Here’s a look at SYNO’s chart the day before entry:
(Click for full-size image, courtesy of TeleChart)
On Friday, I got my entry signal and went long. However, the stock wasn’t acting the way I would have expected it to as it got back on the move. The buying was sluggish and upside traction was short-lived. Although the stock closed higher on the session, it fell back into its base, finishing on a weak note to end up right back below the trend line.
Over the weekend, I raised my stop on the trade. This is quite common for me as a trade progresses, particularly when I’m facing a potential failed breakout like this was setting up to be. The best breakouts will trigger and rarely even look back, but that isn’t what this one did. On Monday, the stock gapped lower and never turned back up, so I was stopped out right after the opening bell. Here’s a look at SYNO’s failed breakout:
(Click for full-size image, courtesy of TeleChart)
While the failed trade cost me money, it certainly could have been worse. I could still be in the stock having to babysit a losing trade. I could have left my initial stop intact and taken a larger loss than necessary. I suppose I could have decided it’s now an “investment” and cling to hope that it will turn back up.
But I didn’t.
Sluggish breakouts can’t be trusted, it’s as simple as that. When you enter trades as stocks clear key levels, it’s difficult to know just how far a good move can carry. However, it isn’t too difficult to know when a stock is stinking up the joint and sending smoke signals that it lacks the gusto to keep going. Pay attention to those signals!
Keeping close tabs on the character of moves will let you hang onto more of your trading capital on those occasions when you’re wrong, which is the name of the game. Small losses are very manageable, but stubbornness isn’t. So the next time you notice a breakout play starting to falter, cut it quick and move on to the next setup.
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]
