Don’t Fight The Tide
Trading
stocks is all about one thing: placing your bet when the odds are in
your favor and the upside far exceeds the possible downside. The recent market
has been pretty rough as seen through the major indices.
In all markets, investors and the
media will always be able to talk about something that has been working.
Recently, the small- and mid-cap markets have been the talk because they have
been rallying. As investors, it is important to play when the most odds are in
our favor and follow our strategy. Trying to
make money in every hot sector or market is a good way to go broke. Most people
who try and do this will find themselves chasing the hottest spot of the day
after it has already began to pull back. Instead, it is important to know what
to look for and hone in on it.
Kevin Haggerty made an excellent
statement in his column, Slim
Jim SPX/NDX, that caught my eye on today’s TradingMarkets home page:
“Anyone who is daytrading the SPX and NDX had a homerun trade
yesterday.” I saw he noticed the setup occur as a “textbook trade.”
Obviously he knew what he was looking for, waited for it to occur and then acted
on it. I am not claiming that I too made the daytrade on the SPX or NDX, but I
did see a coincidence with our two totally different trading styles. After years
of study and practice, you begin to look for a setup. Eventually it appears, as
it has in the past and in the books that may have originally introduced the
pattern to you. Patience is required to wait for what you are looking for, but
when it occurs, you make your move.
For the investment strategy I follow,
as well as for many of you reading this column, the market has been very bad for
the past 2+ years. Each day of market declines, it seems as though our ideal
environment will not happen again or set up anytime soon. It is important not to
be distracted by any of the talk or noise you see so that it doesn’t take away
from the analysis of the market and individual stocks that we should be doing
day in day out. Just as with Kevin’s setup, our ideal setup will eventually
occur. This slow period has happened before and will happen again someday. But
in between, the market will confirm a rally and leading stocks will break out of
sound bases and produce significant profits for investors that have remained
disciplined.
At the present time, the S&P
500 and Nasdaq have both killed
their recent rally attempts by undercutting the lows. Today, the market is
rallying as I write this and volume is very heavy on both the Naz and NYSE.
Looking for a confirmed rally is the first step in where we currently stand.
Following that, it will be important to find stocks that have formed tight base
structures and have leading fundamentals. In the meantime, patience rules the
market.
Mohawk
Industries
(
MHK |
Quote |
Chart |
News |
PowerRating) is a recent stock that moved through its pivot
of 67.05 and was unable to produce results as it was seen trading almost 4%
below the pivot this morning. This is just an example of trying to fight the
tide of the market.
Just as we watch stocks break out
prematurely, new ones are working on base formations each day. One such example
is Autozone
(
AZO |
Quote |
Chart |
News |
PowerRating). This fundamentally
sound company experienced over a 200% run-up to the base is presently working
through. Many others are forming or already exist, for when the overall market
is ready in the upcoming weeks or months.
Until Thursday,