Pop Up Lessons
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
Friday, the Nasdaq gapped sharply higher (a) but immediately began to
slide. It chopped around for the remainder of the day and closed
poorly (b).
On the
bright side, the index managed to stay just above its 50-day moving average.
However, it
still looks like we’re in for a few days of correction–either down or sideways.
Print this chart and label it “this is
why I shouldn’t buy gap openings, especially in an overbought market in a
longer-term downtrend.” For
you day traders, you can take the flip side: When a market is overbought and pops up,
there may be an opportunity for a short with the risk being the
morning’s high/open.
Friday’s market also gives us another
lesson: suppose you held a short position overnight, and with the futures up sharply, you
know the stock will likely gap though your stop. You can pull the stop and
wait to see if the stock gaps to near its exact high. You’ll probably know this
within the first 5 to 15 minutes after the
open. You MUST have an “uncle point,” where you will get out if stock keeps on going. If the
stock does reverse, then you can “trade out” of the position or replace your
stop. Keep in mind that the above requires the utmost discipline. I’ve
seen many traders, who fully understand this, end up like “deer in the
headlights.” Rehearse what you will do before the open.
As most of you know, I’m a momentum player who looks to looks to enter on
mostly pullback setups. So for me, the
longer-term overbought downtrend is set up with mostly shorts and very few
longs.
On the short side,
look at Partner Reinsurance
(
PRE |
Quote |
Chart |
News |
PowerRating), which is in the weak insurance sector
(
$IUX.X |
Quote |
Chart |
News |
PowerRating), and ready to resume its
breakdown out of a Bow
Tie.
FPL Group
(
FPL |
Quote |
Chart |
News |
PowerRating), in the weak utilities
sector
(
$UTY.X |
Quote |
Chart |
News |
PowerRating) and on the Pullbacks
Off Lows List, could start another leg lower. Ditto for
Entergy
(
ETR |
Quote |
Chart |
News |
PowerRating).
Random Musings
Notice the move (a) in Aflac
(
AFL |
Quote |
Chart |
News |
PowerRating)
(mentioned Wednesday) on Friday. It looks like someone stepped on the duck.
Anyway, this is what I would label a parabolic move based on the stock’s normal
volatility. If you’re fortunate enough to catch such a move then you should lock
in a piece, if not the majority, of your profits. I’ll cover this in detail in
an upcoming trading lesson.
In general, I
don’t trade stocks less than $10 a share. For those of you who do, you’ll notice that
many of the nets on Friday’s Strongest Sectors of the Past 5 Days
and Internet
Fab 5 List, are coming back from the dead .
These stocks may be worthwhile on first pullbacks.
Best
of luck with your trading on Monday!
P.S. Reminder:
Protective stops on every trade!
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