Best of the BattlePlan: Why Swing Traders Sell into Strength
Stocks are moving higher in the first hour of trading on Wednesday following yesterday’s sharp sell-off.
It’s been a relatively quiet week in the TradingMarkets BattlePlan. Since we last checked in, we’ve only had one exit of note and that is in a trade we added back in the second half of August.
The trade opportunity in Momenta Pharmaceuticals
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PowerRating) came as the stock pulled back after spiking higher early in August. The spike, which caused a Short Term PowerRating downgrade in MNTA to an exceptionally low 2, kicked off a significant correction in the stock that dropped its price from just shy of $20 to just over $15 by mid-month.
Six days after the big spike in Momenta on August 6th – and the even more powerful reversal on August 7th – the stock began to display the sort of low, 2-period RSIs that indicate an oversold – if not extremely oversold market. At the same time, Momenta Pharmaceuticals developed its first high Short Term PowerRating of the correction, an 8. One day later, the stock’s Short Term PowerRating increased further to a 9.
It was on the second day that the stock produced a Short Term PowerRating of 9 that we took a long position in MNTA. As usual, intraday weakness afforded us an opportunity to take a position in the stock in the lower half of its trading range on August 18. Traders who waited for even greater intraday weakness took positions even lower.
Unfortunately, Momenta Pharmaceuticals struggled to move significantly higher over the next few days. The stock maintained its high Short Term PowerRating for 5 days after we entered the position. But as the selling pressure relented, buyers were reluctant to step in and accumulate the oversold shares. Eventually, buyers did bid the stock higher – high enough, at least, for us to exit the position on strength – but not enough to make for the sort of profitable trades we had enjoyed last week and for all of August.
Although the trade in MNTA did not work out as well as planned, it is worth noting where we were able to exit the position. By waiting to exit on strength, even though the trade was not profitable, we managed to sell MNTA when its price was higher rather than lower. In fact, since we exited MNTA, the stock price has only traded lower, once again reaffirming the effectiveness – even in less successful trades – of exiting on strength rather than weakness.
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David Penn is Editor-in-Chief at TradingMarkets.com.