Archive for October, 2007
Deciding if a Stock is Trade-Worthy
October 31, 2007 at 9:58 am
I’ve noted before that I review many charts every night in my preparation for the following trading day, and I will probably always do so. I think there are numerous benefits to it, including keeping a streamlined watch list of trading ideas at your disposal, which greatly aid in my trading.
Since I’ve already reviewed my charting routine, I’m hoping it will help you out to explain a bit just how to go about deciding if a stock is actually “trade-worthy.” There are several things I check for as I flip through the charts, so let’s go through 5 of them and see if there’s some particular aspect of my process which can help you in yours!
Does the stock have a pattern?
I trade from the chart patterns, and the main reason why is that I know where to get into and out of trades. Every trader needs to have some kind of method for determining entries and exits, and for me this comes from the charts. Chart patterns can assist all sorts of trading methods, from short selling to playing uptrends or looking for reversals from support and resistance levels. Regardless of your method, watching the charts closely and having some familiarity with the patterns will help you often in knowing whether a particular stock should be on your trading list.
Does the stock meet your price & volume requirements?
Asking yourself these things when you run across an interesting chart will help you to quickly determine whether you’ll be able to get into or out of the stock smoothly, as well as whether there’s some potential for movement once you’re in. Illiquid stocks won’t have sufficient trading volume, showing an absence of buyers and sellers. That’s never a good thing, because your buy and sell orders need to be fulfilled by other sellers and buyers. The stock’s price can also have an impact on whether you’ll want to trade it, as some expensive stocks can carry a wide spread and move too far for your comfort. At the same time, a cheap stock may not offer up enough opportunity for price fluctuations if you take the trade.
Does the stock have earnings on the near horizon?
This is a big one every 3 months, as a slew of earnings reports begin to roll in about 2 weeks after the end of the quarter. These scheduled news releases are company-specific, and trying to trade them is a complete gamble. A good plan is to simply do your charting homework and then check the earnings calendar from a site like Yahoo Finance to be sure an entry in a stock won’t coincide with the news, particularly since they usually mean significant price gaps.
Does the stock have a history of making tradable moves?
A stock’s character, particularly in recent weeks and months, will play a major role in how (or even if) it should be traded. Watching at recent history to see if a stock tends to make good multi-day moves in a trending fashion, or if instead it typically makes quick one-day splashes followed by indecision will go a long way in helping you determine your strategy in trading it. Some stocks make habits of trending smoothly, while others gap frequently or may simply ignore indicators you rely on in your trading method, and each of these factors should be weighed before an entry is considered. Every stock has a personality, and the key to good trading lies in finding stocks whose personalities match your trading style.
Is the stock approaching key resistance or support?
Some stocks will have every important variable in place, but the only potential impediment to a lasting move could be major resistance or support (for a short sale). These levels will appear as congestion areas on the chart, and will often slow down a stock on its way higher (or lower). Anytime I see these virtual speed bumps on the horizon, I will not consider swing trading the stock but will instead just take it for a day trade to grab a quick move.
No matter which trading method you prefer or timeframe you trade on, make it a point to add some consistency to your preparation process. Having some well-defined qualifications for stocks you’re considering placing trades in will keep you disciplined and will no doubt add a layer of confidence to your approach, which will help you get back on track when you need it and stay there.
Trade well today!
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 Pullbacks Help Build New Chart Patterns
October 29, 2007 at 7:10 am
The recent market pullback may or may not be finished, but it brings up an important subject which is why pullbacks within trends are good and healthy. Whether we’re talking about an uptrend like the one the market is currently in or a downtrend like we’ve seen before, prices don’t move nonstop in the same direction without taking some breathers along the way. Call them pullbacks or retracements or dips or whatever, but the fact remains that contra-trend moves certainly help to produce new chart patterns for potential new entries as the trend continues.
In the current market uptrend, pullbacks help to shake up the charts and allow them to reset. This creates new base-building opportunities for stocks which had previously gotten too extended to chase. As a stock goes parabolic and keeps climbing higher without a rest or dip, new buys become very high-risk.
I never want to buy a downtrending stock, but I do get excited when I see pullbacks come along. Even just 1 or 2 bars of downside within an uptrend can lay the foundation for a new base or chart pattern to build. Let’s look at an example and I’ll show you what I mean (click the thumbnails to see the full-size images).
The Uptrend
HANS has been trending higher at a rapid pace, hardly slowing down for new entries. Here’s a look at the run:
(Click for full-size image, courtesy of TeleChart)
The Pullback
A week ago, HANS sold off hard with a pair of downside spikes coming right off the highs, shaking up the overall appearance of the chart and signaling a temporary end to the nonstop run. Although traders who held the stock during the decline no doubt felt some pain, this kind of shakeup is exactly what can bring opportunity. The pullback itself doesn’t make a new base, but it does create the framework for a new base to mature from. Here’s a look at HANS post-pullback:
(Click for full-size image, courtesy of TeleChart)
The Rebuilding Phase
Since the dip, HANS has bounced again and currently is back near the highs. This allows us to draw two trend lines, one along the recent lows and the other along the recent highs, creating a bullish ascending triangle pattern. This hypothetical example shown below needs more time to mature and really develop fully before it would be a trade I’d take, but I’ve drawn in yellow bars to show how price might cooperate in order to allow this pattern to be complete. Some additional horizontal price action within the blue triangle would create a solid base from which a new advance could build on, while simultaneously providing a tighter natural stop-loss level as the triangle narrows. Here’s a look at one way in which this pattern might progress:
(Click for full-size image, courtesy of TeleChart)
I like the HANS setup and would consider taking it for a trade if it develops the way I’ve hypothesized, but the example should help to show you the kinds of things to look for after seeing a dip in the market or a particular stock which you’ve noticed climbing nonstop. The initial dip sets the base-building process in motion, and that’s always a good thing. Pullbacks should be a welcomed sight for any technical trader, and now you have one example of something to watch for in the charts the next time a dip comes along.
Trade well today!
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]
Technical Picture Improving
October 28, 2007 at 8:25 pm
Last week MSFT the bulls produced a turn back up, bringing about the possibility that the short-term correction might be coming to an end. Each of the major averages poked above their pullback trend lines, setting the stage for another leg up to begin. This is of course looking at the indexes from purely a technical standpoint, so the bulls now have something positive going for them and will have a chance to build on it this week.
Speaking of this week….Halloween is sure to provide some excitement, and not just for candy-lovers like me. đ The real fun will be Wednesday afternoon when the FOMC announces its decision on interest rates and its policy statement, which the market will undoubtedly respond to. Big Ben certainly has the ability to shake things up, so although the technical picture is improving, come Wednesday afternoon all bets are off because it will really boil down to how the market likes what it gets from the Fed. Either way, the volatility isn’t likely to go away quickly, which means ongoing opportunity for nimble traders.
Regardless of your directional bias, 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 (and every Sunday).
Trade well out there 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]
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 â 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 didnât 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 âpaper lossesâ and convince themselves of the old argument that âitâs not a loss until you take it.â 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 youâre on the wrong side and itâs 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. Youâll 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]
