Hope You Didn’t Blink
Each evening we focus
on the most interesting aspects for the upcoming trading
day. The comments are based on observations of the nightly
updates of the Stocks/Sectors and Market Bias pages. They
are provided for educational purposes only and are not
intended to be direct trading advice. Also, keep in mind
that these remarks are made up to 12 hours in advance of the
markets opening. Therefore, overnight events may alter the
outcome of these observations.
Heads up! After the close,
there was a plethora of earnings announcements and news–mostly bad.
On
Thursday, the Nasdaq gapped up significantly (a) and mounted a decent
rally to near the 2600 level (b). However, it stalled out and closed poorly (c).
Thursday’s action, combined with
the negative after-hours news, leads me to believe that the bounce is over. Oh
well, it was fun while it lasted. Hope you didn’t blink!
So what do we do? Finding
potential shorts was easy tonight (Thursday). Finding potential longs wasn’t.
Therefore, if I heard the database correctly, it’s saying that the short side is
the logical play for Friday. Just be careful as we could get a pop down opening.
Also, it’s choppy enough to warrant keeping it light (no matter which side you
trade).
Looking to potential setups, ENSCO
(
ESV |
Quote |
Chart |
News |
PowerRating), mentioned Wednesday
night and on
the Cup
and Handle List, still looks like it has potential.
On the short side, Keithley
Instruments
(
KEI |
Quote |
Chart |
News |
PowerRating), on the Proprietary
Implosion List, is a Bow
Tie.
Brocade Communications Systems
(
BRCD |
Quote |
Chart |
News |
PowerRating), also
on the Proprietary
Implosion List, stalled out after rallying earlier in the day. This suggests
that its meltdown remains intact.
Example Time
Six years ago, the following words inspired me to study
volatility:
“The Connors-Hayward
Historical Volatility System has an uncanny ability to predict major moves.
Unfortunately, it does not tell you in which direction the move will be.
Therefore, the strategy you select will depend upon the strategies and
indicators you are comfortable with”*
After reading this, I sought out classical technical
patterns and developed my own swing trading patterns to capitalize on this
inherent feature of volatility.
Let’s do a walk-through on
Advanced
Micro Devices
(
AMD |
Quote |
Chart |
News |
PowerRating), mentioned recently:
To review, the
theory behind volatility is that it reverts to the mean (average). This means that
periods of lower-than-normal volatility are normally followed by an increase in
volatility (and price) as volatility reverts to is mean. The easiest way to
explain this is through a joke: if you know someone who’s normally
“mean” and he is nice to you for a few days, chances are he will revert to being mean**.
The volatility of
AMD, as measured by a 6-day/100-day historical volatility ratio (a), dropped
well below 50%–the red line in the chart below. Notice that the stock
traded mostly sideways in a narrow range for quite some time. This confirmed the
low volatility readings and suggested that a large move was eminent as
volatility was prone to revert back to its mean. However, as stated above, the
problem with a volatility play is that you don’t know direction. Therefore, I
always put together a game plan in attempt to predict the outcome. With that
said, AMD was in a strong uptrend from major lows. The stock also formed a
big picture cup and handle (not shown). Then, on Wednesday (b) the stock took
out the top of its recent range and closed well. This gave us an entry. Notice
on Thursday (d) that the price expanded to the upside (d) as volatility (c)
began to revert to its mean.
To those new to
using volatility in trading, I realize that these concepts can be somewhat
intimidating. However, I can assure you that it’s well worth your effort to
learn them. Therefore, I suggest you read my articles on volatility under
Trader’s Lessons.
Thanks Larry (and Blake)!
Best
of luck with your trading on Friday!
P.S. Reminder:
Protective stops on every trade!
*Investments Secrets Of A Hedge Fund Manager,
Larry Connors/Blake Hayward
**or as Jimmy
Buffet once said, “A ___s (rhymes with fast moles) were born that way and
will probably stay that way for life.”
“….straightforward
and understandable…..”
Scott R.
No risk, 30-day, money
back guarantee.