Follow Your Rules, But Know When To Break Them
Good morning. For
today’s session I suspect we will see good action in the tech sector after
positive comments from Oracle
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in terms of the business cycle. The
market will need to see other tech companies making similar statements, in my
opinion, before any major upside move takes place.
Look for rotation out of the drugs and consumer staple stocks, beneficiaries of the recent downturn.
Despite this good news, I still feel the market will remain
range-bound until we break the narrow range we have been in.
The S&Ps need to close above 1247 to establish some continuation.
Intra-day, the S&Ps should see upside resistance at 1232 and 1237,
and support at 1221. The NASDAQ
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also needs a strong close above 1756 to break the range, look for support at
1700. Strong volume is also sorely
needed.
If in fact the market can sustain the early morning gains
and money starts to flow to techs, it appears that IBM would be a natural place
for the cash to go.
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is the one tech stock that has actually held in during the debacle, a move above
120 would be very bullish.
One of the difficult things about the current market is the
lack of volume and follow through. My usual trading style is slightly less
effective in these markets but will still allow for good trades if I am patient
and selective. My number one rule
is to trade with the trend, regardless of the time frame I am looking at. However, in markets that are choppy and where moves are often distorted due to
little volume, it pays to sometimes throw that rule out the window.
As Market Wizard Ed Seykota said so well, “Follow your rules, follow
your rules, and know when to break your rules.â€
A quick look at the charts below will indicate that fading the move in the direction of the trend can prove profitable under the
right circumstances. The first
chart is of EMC
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Notice how at “A†the price blows through its upper Bollinger Band.
Additionally, the move was not confirmed by a noticeable increase in
volume. The September S&Ps
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Those who are familiar with the concepts behind Bollinger Bands will
recognize the probabilities of the price retracing back within the bands after
it breaks through them.
Â
Chart provided courtesy of AT
Financial
Point “B†on EMC indicates the opposite approach, a
sell-off on light volume, which reverses after a nice basing pattern and a turn
upward in the S&Ps.
Â
Chart provided courtesy of AT
Financial
The challenging part is knowing exactly when to enter the
trade. It is always possible it could be the start of a violent upside move, so
make sure you use tight stops. The
key is to watch the S&Ps, if the S&Ps begin to fail / rally, you
can be reasonably sure that the stock will follow suit, especially under the
circumstances described above. Price
distortions on low volume usually lead to opportunities.
Until tomorrow….trade selectively.
Dave
David Floyd is a managing partner of FMB Trading Group. He
focuses on highly liquid NYSE stocks and makes between 25 and 100 trades each
day. His strategy, which incorporates market dynamics, patterns and
momentum, has allowed him to achieve returns of 428% in 1998, 668% in
1999, and 1132% in 2000.