Watching With The Kill Switch
The high-performance
breakout stocks continued Tuesday to act well, although Orion Power Holdings got
whacked and the home builders weakened.
Orion
(
ORN |
Quote |
Chart |
News |
PowerRating), one of
my ideas, slumped 9.0% on three times its usual trade after the independent
power producer disclosed plans to register a $300 million equity offering
shortly.
Among the home builders,
Pulte
(
PHM |
Quote |
Chart |
News |
PowerRating) fell 9.2% after announcing it will buy Del Webb
(
WBB |
Quote |
Chart |
News |
PowerRating) for
$800 million in stock. Toll Brothers
(
TOL |
Quote |
Chart |
News |
PowerRating) lost 2.9%.
Most of the day’s up moves in the
breakout stocks came on lighter volume. Examples included Metro One
Telecommunications
(
MTON |
Quote |
Chart |
News |
PowerRating), Callaway Golf
(
ELY |
Quote |
Chart |
News |
PowerRating) and Fluor
(
FLR |
Quote |
Chart |
News |
PowerRating).
Chicos FAS
(
CHS |
Quote |
Chart |
News |
PowerRating) moved out of a cup-with-handle on weak volume. As I pointed
out in yesterday’s commentary, prepare for stocks to pull back and experience
some volatility after their moves out the gate. Give them room, but enforce your
sell rules if any positions contact your stops.
Here’s a trick for the experienced,
vigilant Level II trader: Sometimes those crafty market makers will take down a
stock just below the day’s intraday low or some nearby level of support to shake
out shareholders and earn the spread. If this happens to coincide with your stop, but
the stock doesn’t crack below your stop, you just might be able to hold
on.
Assuming the price stabilizes at the
level, watch the Time and Sales readout on your Level II. If very little stock
is changing hands at the price, the market makers
may be playing games. Sometimes, the stock will rebound, but don’t take your eye off that
screen. If there is heavy trade, get out! Sell! Sell! Sell! If the price heads
further south, get out, even if the order flow is feeble. If the stock just sits there as the session close approaches, get out.
I debated with myself about sharing
this tactic with you. Do not use this as an excuse to fudge on your stops. Try
this only if you have already established a trading history of strict money
management. Do not use this technique if you have trouble acting on your sell
rules. It will set you up for even worse losses than you have already incurred.
If you do try this, make sure that you
preset your sell order in advance. I do this with all my trades. I fill out the
number of shares, the ticker and the transaction type (e.g., market order to
sell) for every position. This “kill switch” speeds up your defenses
while reducing the possibility of making stupid order-entry mistakes under
battle conditions.
Remember friends, that I’ll be on the intermediate-term trader’s message board tonight starting at 8 p.m. Come and bring your trading questions. To find us, click on the TMWORLD tab at the top of this page or the home page. Then click on the Message Boards link and the Intermediate-Term Board link.
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.