Beware The ‘Gator
Wednesday’s sell-off sent a fresh set
of decliners down to support levels, setting up a tempting pivots for the short
trade. But I wouldn’t tickle the tummy of this alligator!
Unlike January-February, which
witnessed plenty of breakouts from upside-down seven-week-plus bases, the latest
crop of would-be setups are forming brief pauses, rather than full-fledged
patterns, above support. These alligators may only be acting complacent.
Try going short, and you could run smack into a short-covering rally.
Nokia
(
NOK |
Quote |
Chart |
News |
PowerRating) is an example of what
I’m talking about. The stock meets the medium-term momentum player’s insistence
on a major downtrend. After such a downtrend, I’d like to see the formation of a
proper inverted cup-with-handle, with the stock reacting up over the 50-day
moving average to clear out the short interest, then round back down to setup a
handle for the entry. The reaction and return move should take at least seven
weeks.
Nokia’s reaction fell far short of its
50-day moving average and return has taken just under three weeks to threaten
the Feb. 23 price support. The stock is probably headed lower, judging just on
the basis of the major downtrend and falling relative strength line. But this is
not the optimal setup. There could be plenty of shorts lurking here, hoping to
ride another down leg before covering.Â
All stocks are speculative. In
any new trade, reduce your risk by limiting your position size and setting a
protective price stop where you will sell your new buy or cover your short in
case the market turns against you. For an introduction to combining price stops
with position sizing, see my lesson,
Risky Business. For further treatment of these and related topics,
check out the Money
Management area of TradingMarkets’ Stocks Education section.