Home Off The Range
On Thursday, the Nasdaq lapped slighter higher,
sold off early but then gained footing. This rally lasted until the
mid-day drift and then resumed later in the day.
This action has the Nasdaq closing well and
suggests that its recent highs will be challenged.
The S&P also dipped early on before mounting
an impressive rally. This action suggests the top of its recent
trading range (or base if you prefer), circa 1100, will be challenged.
A break above this base would be a major positive. And, of course, a
break below it would be a bummer (unless, of course, you are short).
So what do we do?
Thursday’s action is encouraging. As mentioned above, as long as we
can stay above the bottom of the trading ranges, we can continue to
nibble on the long side.
Looking to potential setups, tonight’s Pullbacks
Off Highs List has quite a few decent looking stocks. Stick with
the strongest in the strongest sectors such as Neurocrine Biosciences
(NBIX).
Example Follow Up
It seems that every
time I talk about using volatility, specifically low–volatility
situations, I get a lot of questions. Although the concepts can be a
little overwhelming at first, I can assure you that they are well
worth your effort to learn them. Volatility is essentially "mean
(average) reverting."
The way to remember this is if you know someone who’s normally mean,
and they’re nice for a few days, chances are, they’ll revert back to
being mean. Seriously, with volatility, periods of lower-than-normal
volatility tend to be followed by periods of higher or more average
volatility. Price expands (in either direction) as this volatility
reverts to its mean. Think of stocks as resting/contracting, expanding
and then repeating the cycle over again. As Connors has taught me, one
of the best ways of measuring volatility is by using a 6-day
historical volatility reading divided by the 100-day historical
volatility reading. This is also known as the 6/100 HV ratio.
Because HV is based
on closing prices only, I plotted a close–only
chart of Blockbuster Entertainment (BBI),
mentioned recently. Notice that the volatility ratio was running below
50% (a). This means that the 6-day HV reading is less than 50% of the
100-day HV reading. Also notice during this same time, prices
compressed into a very narrow trading range (b). Remember, volatility
does a good job of predicting a breakout but does not predict
direction. For this, I turn to my old friend the trusty blue arrow.
Notice that BBI was in a strong uptrend (c) before it formed its high
level base. Now notice that the breakout was to the upside (d) as
volatility began to revert to its mean (e).
Again, I know volatility can be a little
overwhelming at first, but I can assure you that it’s worth your
trouble to learn how to incorporate it into your trading. For more on
volatility, see my articles under Trader’s
Lessons, my
book, and/or Connors
On Advanced Trading.
Best of luck with
your trading on Friday!
Dave Landry
P.S. Reminder: Protective stops on
every trade!
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