Go Where The Strength Is
A number of my fellow medium-term
traders have expressed frustration with tech. The big-caps have snapped back off
the lows, but remain buried under tons of overhead resistance. My answer is to forget about big-cap techs.
We’re seeing plenty of strength
elsewhere. Go where the market strength is. In past columns, I’ve pointed to
select stocks exhibiting both high relative
strength and encouraging price and volume formations in retail and
financials. Examples have included American Eagle Outfitters
(
AEOS |
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News |
PowerRating), Lehman
Brothers
(
LEH |
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PowerRating) and First American Financial
(
FAF |
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PowerRating).
We’re seeing some strength in the defense stocks. Newport
News Shipbuilding
(
NNS |
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News |
PowerRating), the giant shipyard that makes and maintains the
U.S. Navy’s aircraft carriers and submarines, appears to be building a
pattern. Sort of. You could use the Dec. 29 intermediate peak as your
pivot point (see Point a in chart). Ideally,
the stock would form a handle here, but some W-pattern moves shoot straight
through the intermediate peak. The latter scenario is playable, but use a tight
stop if you do.
For group confirmation, Northrop
Grumman
(
NOC |
Quote |
Chart |
News |
PowerRating) is basing, with a rising relative strength line as well,
although the pattern is too wide and loose for me.
Remember that all stocks are risky.
Even the best-looking pattern can fail. Even the sloppiest pattern could work
out. I see my job as a trader to stay exposed to the highest probability trades
that I can find, then take swift action to prevent the inevitable failures from
damaging my account.
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.