All Entries in the "Chart Reviews" Category
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]
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]
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]
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]
Save Money & Confusion by Avoiding Earnings Trades
July 23, 2007 at 10:37 am
If you’re an active trader, it’s likely that you take a similar approach to me when it comes to earnings reports. Because I have no problem moving to cash quickly, I refuse to hold stocks into earnings announcements. Not only do I have no idea what the reports are going to be, I also don’t know how the market will respond once the report is out. I don’t have a crystal ball, plus the playing field isn’t level when it comes to information, which is why I’m a technical trader.
A key reason why I avoid earnings is that once an earnings report is released, the stock will almost always produce a breakaway gap after the news is out. That can shift the risk/reward profile significantly for a trade, so I tend to just let the stocks settle down later and revisit them at that point to see if a good chart pattern is developing. If it does, I will take it for a trade and manage it accordingly.
We’re right in the thick of earnings season, and it’s important to pay close attention to the calendar and know when your stock is due to report, whether it’s just a stock on your watch list or one you already hold a position in. This can save you money and confusion!
Over the weekend, a great example occurred of how watching the earnings calendar before a trade helped prevent confusion for me. I have had CALM on my radar for a few days for a potential buy, but before I actually set up my order for the stock I checked the earnings calendar first. I soon realized the report was coming out this morning in the pre-market, so I didn’t set up the trade. Here’s a look at how CALM looked prior to today:
(Click for full-size image, courtesy of TeleChart)
CALM gapped higher this morning but instantly came under pressure, falling 6.8% from its best level of the day in less than 40 minutes. Had I bought the stock, I’d have found my trade quickly underwater, which would have added some confusion on just what to do…(Wait for a rebound? Take the loss?). Here’s a look at CALM after the gap up and the way it left the daily chart looking:
(Click for full-size image, courtesy of TeleChart)
Just remember, earnings are tricky all around. Whether it’s a stock you already own or are merely considering an entry in, watch the earnings dates closely and be willing to avoid the stock around that time. There is a sea of stocks to choose from, so let the news-related excitement dwindle so that you can make a better-informed trading decision.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
Just Buy Something!
July 12, 2007 at 7:42 pm
Huge up days in the market like today have amazing power. Ordinary investors love them, because everything they own goes up. Traders sometimes hate them though, because underperformance can be common.
It almost never fails that on days when the market makes a giant move, my friends or family will inquire about how great my day was. It isn’t always what they might think. Maybe you’ve had similar experiences. Some of the best days even come when “the market” does very little, which is funny. But back to the topic….
Days of big point gains leave underperforming traders feeling like they need to JUST BUY SOMETHING so that they can participate in the move. That’s not always the solution, because if you’re a disciplined trader there are certainly days when the stocks you look at for possible trades simply don’t fit your criteria. So if you happen to underperform on a day like today, consider a couple of concepts which may help you get beyond the frustration of “missing out.”
* Walk away. It’s a choice each of us have as traders. Just shut down the PC and get out of your chair. Some days you don’t have it, so don’t force it if that’s the case. Maybe it’s you, or maybe it’s the market, but either way the bottom line is you’re not making bank. Come back and fight another day.
* Trade ETF’s. Sure they move slower than many of the high-beta names you might prefer to trade, but they are a definite solution that allows you to participate directly in large market moves. You can leverage up to offset the slower percentage moves, plus they’re liquid as can be so that makes them easy to jump into and out of.
* Be confident in tomorrow. I’ve had some great days right after major market advances like today. It’s funny, but I don’t really trade the mega-cap Dow components like many of which were leaders today. I like to trade lots of secondary stocks, and on days like today those are often an afterthought. Often times the following day, the mega-caps will cool off but traders are still just as eager to buy something. They turn to the secondary stocks, and that’s when you can knock out some nice gains.
Trade well Friday and enjoy your weekend!
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
Grab Trading Opportunities Big or Small
July 5, 2007 at 1:51 pm
It’s easy to fall into the rut of trading the same size for every stock across the board, but on occasion you’ll inevitably run across a stock that fits a lot of your criteria but isn’t quite ideal. That’s when the dilemma arises: Do you ignore it or take the trade?
Volume is a key ingredient to me when I’m considering trades. Not only do I want the stock to be reflecting some level of interest (activity), but I also want to know that I can execute my orders effectively and without too much slippage. Strong volume also tends to mean narrower bid/ask spreads, which means a more competitive market. Naturally, volume is the next thing I look at after the chart. When it seems too light for a trade, my first inclination is to pass on the stock and move on to the next, but that isn’t the best or only option I have.
So in the case of the light-volume-but-bullish-stock, why not pick up a few shares if the chart is good and simply take a smaller position? If it pays off and the chart pattern produces the move you’re expecting, the profits may be slightly smaller but it’s still money in your pocket!
RIMG is a stock I’m currently eyeing which has a nice bullish pattern but trades much lighter volume than I generally prefer. The pullback of the past two weeks off the recent high has created a large bull pennant pattern, and a push up through the upper trend line will confirm the pattern and could free up this stock to head north.
(Click for full-size image, courtesy of TeleChart)
Instead of passing on the trade entirely due to the light volume, simply taking a smaller position in the trade if it goes would still allow room for some profits. Perhaps that will translate into a smaller winner than another trade where I may have a larger position, but as a trader I’m all about seizing opportunities whether large or small.
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]
