Does Thusday’s Action Give Us The All Clear?
Better Than A Poke In The Eye
As I’ve mentioned in the past: Money management — the use of protective stops, trailing stops, and profit taking — is crucial to your long-term success as a trader. A simple money management system is to take at least half of your profits when they are equal to or exceed your initial risk. You then move you protective stop on your remaining shares to breakeven. This way, barring overnight gaps, you have a “free” position that has the potential to turn into a homerun (through the use of trailing stops).
Let’s follow up on the Biotech HOLDRs
(
BBH |
Quote |
Chart |
News |
PowerRating), mentioned
recently. Assuming those parameters outlined in my primer on swing trading (see
notes below), this would have given you an entry of 140.90, an initial profit
target of 143.90 (140.90 + 3), and an initial protective stop of 137.90 (the
entry of 140.90 – 3). Notice that after the entry, the stop was then
trailed higher on a 3-point basis (on the closing price). Once the profit target
was hit, half of the position was sold and the protective stop was then bumped
up to breakeven — the same as the entry. This stocked dropped to hit this stop on
Thursday.
As you can see, without money management, this slightly
profitable trade (overall) would have resulted in a loss. Make sure you exercise
money management.
If you’re new to momentum-based swing trading and would like more information on the basics such as trend, entries, and money management, e-mail me and I’ll be happy to send you the primer section from my second book.
On Thursday, the Nasdaq opened firmer but soon began to
drift lower. It found its low by mid-day and then generally worked its way
higher for the remainder of the day.
This action puts it just above its 50-day moving average and
right at the top of its trading range (minor resistance).
The S&P put in a somewhat similar performance but
wasn’t nearly as impressive as the Naz.
This action keeps it above its 200-day moving average.
The semis which have been seriously lagging the market,
bounced nicely, gaining over 5%. This action puts them above their recent lows
and could suggests that their last breakdown was a false one.
So what do we do? Thursday’s action is
encouraging. The fact that the semis rallied in the face of more bad news suggests
that the slide here could be over. And if it is, this would help to improve the
overall mood of the market. True, with a negative Dow and a flat S&P, the
market, so far, doesn’t seem to care. But it will–if we see some
follow though in the semis. Most sectors remain constructive. Financials
including banks, broker/dealer, and interest sensitive areas (mortgage related,
homebuilders, real estate,etc…) remain in uptrends. Retail, chemicals,
selected manufacturing, selected health services, and drugs also appear to be in
their first leg of an uptrend. And, like the Nasdaq itself, many tech areas are
just shy of breaking out. So is this the all clear? Well, not quite. I think you
can start nibbling in the these areas, but keep positions small and honor your
stops just in case we don’t see any follow through.
As far as setups, Intuitive Surgical
(
ISRG |
Quote |
Chart |
News |
PowerRating) mentioned
Wednesday night, still looks like
it has the potential to resume its recent breakout/uptrend out of a Trend
Knockout (TKO).
Best of luck with your trading on Friday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
P.P.S. Learn my newest and most advanced version of my Bow
Ties Strategy. Click
here for details.