Here’s Why This Could Be A Pivotal Day
Many times when I am putting together my daily
column and looking back at trades that I may highlight, it is easy to
overlook using an example, which based on most of my writings is a bit out of
character, or at the very least inconsistent.
That happened in Wednesday’s column. A reader from Spain (a big soccer fan
also, so naturally I already like the guy) sent me this e-mail:
Hi Dave,
Â
“After reading all your lessons, and noticing that your number one rule is
going with the trend, I see that a lot of the setups you show with great
risk/reward are placed against the trend, usually after sharp moves (see chart
below). I believe that I wait for moves in the futures to place orders in the
most correlated stocks that have not moved yet. So in the first instance you
respect the S&P trend to decide on which side you will be, right? For example,
in your
column today you mentioned the trade in Tyco to the long side while the
S&P trend was clearly down.
“See that the Stochastic is oversold, but that’s
normal in a downtrend.Â
I would like to ask you how you establish your rules of priority in your
decisions.”Pedro
It is a great question, and the simple answer can be
summed up with a quote from Tom Basso of Market Wizards
fame;
“Follow your rules, follow your rules, know when
to break your rules.”
Ninety percent of the time, a trade like the one
described above does not take place. However, in this instance there were two
other pieces which played a role in my deciding to place that trade.
- We just broke through critical support. However, it
happened after a long run down from 928 to 921. Rarely are key levels taken
out after an extended move. Critical levels are taken out, and more
importantly, exhibit follow through, typically at the start of a move when
there are fresh sellers/buyers. - Feel and experience. This is naturally something
that is not rule based, but can be realized simply by observation day in and
day out. This is why I always stress that whatever style of trading you
conduct or are looking to implement, that you make that your only focus, come
hell or high water. These subtleties will never, nor can they be, taught in a
textbook. Feel and gut instinct play a huge role in my trading decisions.
Turning to the trading action, I think it is safe to
say that we are setting up, at least from a technical standpoint, for a very
pivotal day. Yesterday’s selloff stopped right at a 38% retracement off the
December high/low. So while the move down has felt ominous and simply a repeat
of all the other rallies that were the “start of the new bull market,” until
this 908-11 level is taken out on the close, the market is still in decent
shape. That does not mean that I feel we are going higher, it just happens to be
where the S&Ps settled last night.
Gold stocks came to life yesterday after consolidating
for several sessions. The metal itself touched new highs, but could not manage a
move much higher. Subscribers to my service were alerted to the setup in the
gold stocks intraday. From there they did manage a nice move higher into the
close. If you decide to trade some of these issues intraday, keep an eye not
only on the price of gold, but the Dollar Index
($DXC) as it appears that this is what is most affecting the price of gold and
gold stocks in an inverse manner.
| Intraday Setups | |
| Â | |
Stock |
Action |
EBAY |
Long |
| IBM | Long |
LLTC |
Long |
MERQ |
Long |
QLGC |
Long |
| UNH | Short |
| BDK | Short |
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Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| *931-32* | 1073 |
| 924 | *1065* |
| 915-16 | 1053-56 |
| 913 | 1045 |
| 909 | 1032 |
| 903 | 1020 |
| 895 | 1016 |
| 887 | 1007 |
As always, feel free to send me your comments and
questions.