Blue Arrows Are Still Pointing…..
On Tuesday, the Nasdaq lapped slightly lower but found its
low fairly early and began to rally. Then, late in the day, it drifted lower.
However, it still managed to close well and in the plus column.
Once again, it is bumping up against an area of overhead
resistance.
The S&P put in a similar performance.
So what do we do? The fact that all major indices are set
up as pullbacks from lows, combined with the overbought condition and sell
signals (e.g., CVR-III Modified), suggests that the market remains vulnerable.
Further, nearly all sectors (with the exception of biotech, see below) are set
up as pullbacks from lows. Therefore, I still think the path of least resistance
still remains down. So, focus on the short side but wait for entries (just in
case) and keep it on the light side based on recent volatility.
Looking to potential setups, Chubb Corp.
(
CB |
Quote |
Chart |
News |
PowerRating), in the
weak insurance sector (and let’s face it, what good is weak insurance?), looks
poised to resume its strong downtrend out of a deep pullback.
Sector Watch
As you know, I pay careful attention to the sector
action. And, as mentioned above, most all are set up as pullbacks from lows.
However, just so you don’t think I’m a complete bear, I thought I’d point out
that biotech is beginning to improve: Notice that the moving averages are coming
together and could “Bow Tie” soon. It’s not time to bet the farm here,
but it may pay to start watching for transitional setups (e.g., Bow Ties,
First Thrusts, cup and handles etc…).
Trailing A Winner
I’m often asked about the potential for negative expectancy
with 2-for-1 money management (sell half when profits are greater than/equal to
the initial risk, move your stop to breakeven and trail a stop on the
rest). True, if all you ever got was the initial profit and then were
stopped out at breakeven, then yes, this simple money management would have a
negative expectancy (i.e., lose money). However, the secret is to make 2X, 3X or
more on the second loaf. Let’s look at a recent example from my trading
service*. Also, before we get into the details, even though I am a “swing
trader,” the goal of each and every trade is to capture a longer-term move.
On 06/20/02, Aon Corp.
(
AOC |
Quote |
Chart |
News |
PowerRating) was recommended as a
pullback from lows. The entry was 30.50, the initial protective stop was 32
and the initial profit target was 29 (1-1/2 points, the same as the initial
protective stop). I chose the initial protective stop based on price
(stocks around $30 or less I normally use around a 1 1/2-point stop), the fact
that this area was an area of resistance (above the pullback) and because
the stock wasn’t incredibly volatile (more volatile stocks require looser
stops). Notice that a
few days later, the stop was trailed and the initial profit target (IPT) was
hit. At this point the trailing stop was moved to breakeven. For most of the remainder
of the trade, I trailed the stop at 1 1/2 points or so depending on the where
the resistance was. As the position became more profitable, I gave it a
little more “room” to breathe. The idea here was to
“survive” corrections (pullbacks) and participate in a longer-term
move. This worked fairly well as the remaining shares were stopped out at 23.35
for over a 7-point profit (around a 24% move). One last point, notice the
gap lower last week and reversal (with the overall market). On a day like this,
it’s probably not a bad idea to scale out of some more shares. See below for the
dates and protective trailing stops. If you would like a zipped archive of all
the services during this period so you can study it more carefully, email me
and I’ll be happy to send it to you.
06/21 32.00, 06/28 31.30, 07/02 30.50, 07/03 29.50, 07/10
29.25, 07/11 27.70, 07/12 26, 07/19 25.75, 07/22 25.10, 07/23 24.15, 07/24
23.35, 07/25 23.35, 07/29 stopped.
Best of luck with
your trading on Wednesday!
Dave Landry
P.S. Reminder: Protective stops on
every trade!
*As much as I would like to, I can’t use one from this
column because I do not follow up with trailing stops.