How To Find Opportunties In This Market
Trail ’em If You Got ’em
As I’ve mentioned in the past, money management–the use of protective stops, trailing stops, and profit taking–is crucial to your long-term success as a trader. A simple money management system is to take at least half of your profits when they are equal to or exceed your initial risk. You then move you protective stop on your remaining shares to breakeven. This way, barring overnight gaps, you have a “free” position that has the potential to turn into a homerun (through the use of trailing stops).
Let’s follow up on the Semiconductor HOLDRs
(
SMH |
Quote |
Chart |
News |
PowerRating), mentioned recently. For a
stock of this price and volatility, a 1 1/2 point protective stop, trailing stop, and
initial profit target is appropriate. Notice below that the stock triggered on
Friday by trading above the prior day’s high. Then today, the stock rallied
nicely and is closing in on the initial profit target. The stop is now trailed
higher based on Monday’s close. Should it hit the profit target on Tuesday, make sure you take partial profits and bump your
protective stop to breakeven on your remaining shares. Full
disclosure: I have a position here.
On Monday, the Nasdaq opened weaker but soon began to
rally. However, it found its high by mid-morning and then worked its way sideways
to lower for the remainder of the day.
1920 appears to be minor resistance here.
The S&P put in a somewhat similar performance.
It remains above its 50 and 200-day moving averages but
below minor resistance (circa 1130).
So what do we do? I continue to like this
market. The indices make it look like nothing’s happening, while under the hood,
there is a quiet sector rotation. One sector rallies while another has an
orderly pullback. On Monday for example, the semis (see above example in the SMH)
rallied nearly 3% while the Nasdaq ended flat. I’ll take this any day over a
euphoric market. It does require a little work though. You have to sift through
numerous setups and study the sector rotation while looking for opportunities.
And once you find them, you have to manage your positions through
protective stops, taking partial profits, and trailing stops higher. But heck,
this is what we get paid to do, right? Continue to focus on the long
side.
As far as setups, Ebay
(
EBAY |
Quote |
Chart |
News |
PowerRating) has formed a
TKO/Pullback. Also notice that it “faked out” by trading above the
prior day’s high. This action may have caught some eager traders off guard and
could have already shaken them out. With these “weak hands” knocked
out, this could clear the way for the stock to trade higher. Look for
opportunity here but wait for an entry just in case we see some additional
selling.
Best of luck with your trading on Tuesday!
Dave Landry
P.S. Reminder: Protective stops on every trade!
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