More Constructive Action
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.
On
Monday, the Nasdaq lapped lower on the open (a), quickly found its low, and
rallied for a solid trend day higher. This action has it
closing well (b). The recent high
of 2892 (c) could provide minor resistance to the upside.
So what do we do?
Although there’re still many ugly stocks out there, it is encouraging that many
stocks have stabilized and begun to rally out of their first pullbacks and out of transition
patterns, such as Bow Ties. That’s the good news. The bad
news is that the perception of what the Fed will do could make for bumpy
trading. Therefore, continue to focus on the long side, trade (and manage! see
below) your setups but don’t load the boat just yet.
Looking to potential setups, Merrill Lynch
(
MER |
Quote |
Chart |
News |
PowerRating), on
the Pullbacks
Off Highs List, formed a bullish outside day in a pullback on Monday.
Leap Wireless
(
LWIN |
Quote |
Chart |
News |
PowerRating), mentioned recently, has formed a
micro cup and handle which is actually part of a bigger picture cup and
handle.
Synopsys
(
SNPS |
Quote |
Chart |
News |
PowerRating), mentioned Friday night, still looks
interesting to me.
Amkor
(
AMKR |
Quote |
Chart |
News |
PowerRating), also mentioned Friday night, is
attempting to rally out of a cup and handle.
On the short side, Newfield Exploration
(
NFX |
Quote |
Chart |
News |
PowerRating), on the Proprietary
Implosion List, looks poised to resume its meltdown.
Looking Ahead
On the worth watching list, Elantec Semiconductor
(
ELNT |
Quote |
Chart |
News |
PowerRating)
has formed a big picture low-level cup and handle.
Example Time
Centillium Communications
(
CTLM |
Quote |
Chart |
News |
PowerRating), mentioned Friday as a
Bow
Tie, provided a great example on Monday. The stock gave us an entry at 45
1/16 (a) when it traded 1/16 above the Friday’s high. Because the low of the
setup (b)* is more than 5% away, we place an initial protective stop at 42 3/4
(c) for a risk of 2 5/16. The stock rallies to our initial target of 47 3/8
(d)–risk + entry–and we exit half of our position. We then move the stop on
our remaining shares to breakeven–the same as our entry (a). Barring overnight
gaps, we have at worst, a breakeven trade on our remaining shares and the
potential for a windfall should the trend continue.
One more point, even if you didn’t take profits at the
initial target, you should have considered taking partial profits as the stock
neared the old highs (e). At this juncture, stocks either breaks through or
fails. It’s better to be safe and lock in a piece just in case of the latter.
Best
of luck with your trading on Tuesday!
P.S. Reminder:
Protective stops on every trade!
*In trading, there are always trade offs. I guess this is why they call it
trading. With that said, as an option, you could place your stop below the low
of the setup and reduce your position size to adjust for risk.
“I just wanted to thank you for writing such a
great book. As you know, there is not a lot of material on swing trading and
your book is very insightful……… I
congratulate you on a fine piece of work.”
Bob D.
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