Today’s Trading Lesson From TradingMarkets

Editor’s Note:

Brice

How To Use TM’s
Indicators: The Proprietary Momentum Lists

By Duke Heberlein

“An object at rest tends to stay at rest and an
object in motion tends to stay in motion with the same speed and in the same
direction unless acted upon by an unbalanced force”

—
Sir Isaac Newton’s first law of motion

I am sure that Sir Isaac Newton was not pondering the movement of stock
prices when he discovered his laws of motion in the late 1600s, but they are not
immune to his discovery. A stock in motion will tend to stay in motion for the
short term, until acted upon by the unbalanced force of profit-taking. This is
not a gigantic revelation to momentum traders with years of experience, but how
does the novice — or one looking to ratchet down their trading time frame into
a shorter period of exposure — begin to take advantage of the “physics” of
stock movement? One of the easiest ways to get a head start on the next trading
day is to go to the

TradingMarkets.com indicator page and add the names that appear nightly on
the
Proprietary Momentum List and

Proprietary Implosion List to your watchlist. These are the strongest and
weakest stocks in our database as measured by TradingMarkets.com’s proprietary
relative strength model and are designed to alert you to where the hottest
stocks are, based on recent market action, to the long and short side.

How to take advantage of the Momentum/Implosion
Lists

The mantra of these lists is momentum begets momentum. The primary strategy
for these stocks is to look for continuation when the stock trades above the
previous day’s high. This is the simplest entry, and by waiting for
follow-through, you protect yourself from getting into the stock after the
momentum has been halted.

Land’s End (LE)
appears on the PML on the evenings of both Nov. 23 (red
oval) and 26. As you can see in the chart above, a simple trade-though
entry above the prior day’s high would have yielded a profit of more than 1
point on the 26th and nearly 2 points on the 27th.

Electronic Data Systems (EDS)
is another issue from the PML on the night of Nov. 26. The momentum spills
over into the following session for a more than 2 point gain intraday.

Using the Momentum and Implosion lists
with intraday patterns

After getting trade-through entry in one of these momentum or
implosion candidates, you can further reduce your risk by placing an initial
protective stop and monitoring the action on an intraday basis. This way you can
protect profits in the event the stock’s movement is in a profitable direction,
or keep your losses small in the case of a whipsaw reversal. The best way to
time your entry using the intraday chart is by utilizing intraday pullbacks and
breakouts from consolidations.

Shire Pharmaceuticals (SHPGY)
shows up on the PIL Nov. 23. The following day we get follow though beneath
the previous low.

SHPGY continues its downtrend and breaks down to a new low.
Traders going short on the breakdown from a very narrow Slim Jim are able to
ride the stock nearly 1 1/2 points lower.

DST Systems (DST)
comes up on the PML list on Nov. 26.

DST provides a solid 1 point profit when it trades above the
prior high. However, observant speculators that notice the market rebound on the
27th are able to take advantage of an earlier Slim Jim breakout and reap the
reward from a solid move from a stock that is pretty conservative on an intraday
basis.

How long will it last?

Ay, there’s the rub. Momentum will continue until acted upon by
the unbalanced force (sellers), but we don’t know when that is going to happen.
The short-term trend could last for as little as a few minutes to as long as a
few days. Lessening your exposure by going home flat at the end of every trading
session will be of great benefit to both you and your equity curve, but in
certain circumstances, you can maximize gains by holding overnight and exiting
the following day either on the open, if the stock fizzles, or later on after it
exhibits further momentum. This approach is not without risk and to hold
overnight is a decision that you need to make according to your own strategies
and risk parameters. Let me add the caveat that this strategy should only be
utilized in the strongest (reverse for short positions) markets and strongest
cycles of that market. However, by stalking these issues for upward and downward
momentum and proper money management of your trades, you will save yourself a
great deal of time and effort in addition to increasing your likelihood of
finding some winners during the trading day.