Here’s 2 setups for this oversold market
Dave Landry is principal of Sentive Trading, a money management firm, and a
principal of Harvest Capital Management. Mr. Landry is the author of two top
selling books,
>Dave Landry’s 10 Best Swing Trader Patterns And Strategies and
>Dave Landry On Swing Trading.
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Damage ControlÂ
In a recent column, I wrote the following:Â
They’re aren’t many guarantees in trading. However, the one thing I can guarantee
is that sooner or later a stock will gap strongly against you. So what do you
do? Well, if you are disciplined, then you might be able to improve your exit or
in some cases, actually still profit from the trade.
On bad news (or more accurately, news that is perceived as “bad”),
stocks can gap sharply lower. However, many times this gap can be the panic low
(or near low) for the day. The stock then promptly reverses and rallies. In some
cases, the stock can actually close higher. Knowing this phenomenon, you can
enact a damage control plan. Here’s how:
You pull your stop, wait to see if the stock quickly “finds its
low”, and then replace that stop below its intra-day low. You subsequently
look to “trade out” of the stock for an improved exit. This is
illustrated below.
Again, this takes DISCIPLINE. You have to have an “uncle point”–a
point where you will exit the stock if it continues to drop. If you’re going to
sit there like a “deer in the headlights” then you’re better off just
letting your stop get hit.
Now, let’s look at a current example. This time it’s on the short side (so
stand on your head so the above figure will match the chart below). Notice that
recently mentioned (see archives) Biotech HOLDRS
(
BBH |
Quote |
Chart |
News |
PowerRating) gapped sharply
higher on Tuesday’s open. In a situation like this, you have to be willing to
exit if your “uncle point” is hit. However, notice that in this case
the stock immediately reverses and drops nearly 5 points.Â
Again, like life, there are no guarantees in trading. However, as you can
see, implementing a damage control plan can often prevent large losses or even
keep you in a winning trade.Â
I’ll cover the above in much more detail, along with many other examples, and
current market conditions
during my weekly interactive audio/visual presentation at Wednesday at 11:00
A.M. Eastern. Admission is free but limited by the software. Email me if you
need instructions on how to join (the same each week) or email me if you would
the recording to this and sessions for the prior year (covering subjects such as
money management, position management, entries, damage control, scanning
etc..).Â
On Tuesday, the Nasdaq opened a little firmer but quickly
reversed to sell off. It managed to bounce in early afternoon trading but then
sold off again late in the day. This action puts it at multi-month lows. Â
The S&P traded back and forth but ended soft.
This action has it closing at multi-month lows.Â
So what do we do? The market is very oversold. This creates a
dammed if you do and damned if you don’t situation. If you buy it, oversold will
become even more oversold. If you short it, it’ll bounce from oversold.
Therefore, look for opportunities in those areas that can trade independently of
the indices. With that said, on the long side, I’m not seeing anything. On the
short side, I’m seeing quite a few opportunities in metals & mining and the
energies.Â
As far as setups, Petroleo Brasilerio
(
PBR |
Quote |
Chart |
News |
PowerRating), mentioned recently andÂ
in the aforementioned energies, looks poised to resume its slide out of a First Thrust (as usual, email me if you need rules). Â
Companhia Vale Do Rio Doce
(
RIO |
Quote |
Chart |
News |
PowerRating), in
the aforementioned metals and also mentioned recently, looks like it has the
potential to continue lower out of a Gatekeeper (as usual, email me if you need rules).Â
See you at the show!Â
Best of luck with your trading on Wednesday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
P.P.S. If you would like a free
trial to my trading service, click
here.