No Rear-View Mirror
One of the best rules for
the intermediate-term momentum trader is to stick with the current leaders.
Don’t try to play the broken down leaders of the past.
This requires staying
true to your discipline and ignoring the never-ending bottom feeding indulged by
the media every time a big-cap tech falls to a new low or tries to rally off a
bottom. This doesn’t mean that I-T traders cannot play turnaround stocks. But we
enter them much later in the process. For more on this, see my lesson,
and Trading Turnaround Stocks.
Tuesday’s trading action
in Sun Microsystems
(
SUNW |
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PowerRating) and EMC
(
EMC |
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PowerRating) illustrate the danger of
trying to bet on these broken down past leaders. PeopleSoft
(
PSFT |
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Chart |
News |
PowerRating) stands
as an example of a fake cup-with-handle. While the stock traced a
correction-recovery shape and put in a sort of platform or handle, it has not
established the kind of resilient prior uptrend that is even more important to
the momentum. Other flaws: The base is far too deep, and the relative strength
line shows anemic performance relative to the general market. Â
The leadership is in the
newer, smaller issues. SkillSoft
(
SKIL |
Quote |
Chart |
News |
PowerRating), a provider of training courses
over corporate Intranets and the Internet, is trying to complete a
base. Â
All stocks are risky. 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.