Cockroach Theory
Each evening we focus
on the most interesting aspects for the upcoming trading
day. The comments are based on observations of the nightly
updates of the Stocks/Sectors and Market Bias pages. They
are provided for educational purposes only and are not
intended to be direct trading advice. Also, keep in mind
that these remarks are made up to 12 hours in advance of the
market’s opening. Therefore, overnight events may alter the
outcome of these observations.
On
Thursday, the Nasdaq lapped lower (a) to its low and then rallied higher for a solid trend day
(b). This action has it closing on its high and
right at recent resistance (c).
Once again after the
close, there was a plethora* of bad
news. My gut tells me that the “cockroach theory” applies here: Once you see a few, chances are
there are many more, so I would expect quite a few more surprises looming in the news. I’d imagine that
a company
would like to get all the bad news out while having plenty to blame it on, such
as the markets, economy, etc. The good news is that, once again, the index futures are
taking it in stride. As you know, the reaction to
the news is more important than the news itself. Therefore, this gives
us one more ray of hope that the bear market may be coming to an end.
So what do we do? Thursday was decent but it was the first
trend day in quite some time. We’ll likely see a return to the choppy market action
that we’ve been seeing lately. This is especially true now that many stocks have
rallied from major lows and are due for their first pullbacks. So, take it easy,
go setup by setup, and be willing to continue to play both sides; and above all–honor
your stops and take partial profits when they are offered.
Looking to potential setups, Caterpillar
(
CAT |
Quote |
Chart |
News |
PowerRating),
mentioned recently, seems to be finding support around 44. This action suggests
that its uptrend remains intact.
On the short side, Alexion Pharmaceuticals
(
ALXN |
Quote |
Chart |
News |
PowerRating),
Gilead Sciences
(
GILD |
Quote |
Chart |
News |
PowerRating), and Myriad Genetics
(
MYGN |
Quote |
Chart |
News |
PowerRating), all on the Pullbacks
Off Lows List, look poised to resume their downtrends out of three-bar
pullbacks from lows.
Looking Ahead
Centurytel
(
CTL |
Quote |
Chart |
News |
PowerRating), on the New
60-day Highs on Double-Volume List, broke to new highs out of a
wide-and-loose base. The stock may be worthy on the first pullback.
Examples
Let’s do another
example. As always, these are for educational purposes only and I do not imply
that you should trade stocks mentioned in my outlooks or trade in a similar
manner. With that said, on Wednesday, in my Options
Outlook, I mentioned that the
drugs
(
$DRG.X |
Quote |
Chart |
News |
PowerRating) had formed a Bow
Tie sell-setup (a).
In my Stocks
Outlook, I mentioned that Schering-Plough
(
SGP |
Quote |
Chart |
News |
PowerRating) still looked vulnerable (a Bow
Tie sell-setup). On Thursday, we get a trigger (a) at 51 13/16, 1/16 below
Wednesday’s low. An initial protective stop (b) is immediately placed 1/16
above the high of the setup at 54, for a risk of 2 3/16 points. This leaves us a
profit target of 49 11/16 for half of our shares. The stock drops and we exit
half of our shares (c). We move the stop to breakeven (d), the same as our
entry (a) on our remaining shares. This way, barring overnight gaps, we have, at
worst, a breakeven trade on our remaining shares with the chance of a home
run.
Best
of luck with your trading on Friday!
P.S. Reminder:
Protective stops on every trade!
Today, I received my first testimonial on the book:
“I received your swing trading book yesterday and I
have already finished half of it. Congratulations on a job well done. It is a very practical, easy-to-read, and straight-to-the-point book. I already started applying your principles
in my trading today.”
Thanks Mom!
No risk, 30-day, money
back guarantee.
*As in: “Would you
say I have a plethora of piñatas?” First one to correctly identify the
movie this line came from gets a free autographed copy of my book (click on my
email link above the “P.S.”).