Say Hello To My Little Friend

On Thursday, the Nasdaq gapped lower and after an
early morning bounce, continued its sell off. It then drifted for much
of the day before resuming its sell off.

Tuesday’s action has the index closing poorly and
well below its 50-day moving average.

 

The S&P also sold
off to close poorly. This action keep the top of the range (1240)
intact and suggests the bottom of the range (1200) will be challenged.

 

So what do we do? It looks like the low VIX
and other market indicators/systems are beginning to unwind. When they
work (nothing works all the time!), they usually follow through for an
average of 3-4 days. They can also be completed by a very large move
in price. Considering today’s action, I think we still have some
additional downside. Therefore, I remain cautious and skeptical. At
the risk of being redundant, keep it light on the long side and
continue to look for shorting opportunities.

Looking to potential setups, Quest Diagnostics (DGX),
on the Pullbacks
Off Highs List
, looks poised to make another stair-step higher.

On the short side, Burlington Resources (BR),
in the vulnerable oil service sector ($OSX.X)
and on the Pullbacks
Off Lows List
, looks poised to resume its strong downtrend.
Just wait for follow through to the downside here as it was up on
Thursday.

Smith International (SII),
another oil service,
on the Proprietary
Implosion List
, looks poised to resume its meltdown.

Walk Through

As you know, from time-to-time I’ll do a walk
through on a stock. Let’s look at Human Genome Sciences (HGSI).
On 07/02/2001, I showed it as an inverted cup and handle. On
07/03/2001, the stock triggered an entry at 57.90–just below the
prior day’s low. A protective stop was immediately placed above the
high of the handle/pullback at 61.20 for an initial risk of 3.30
points. This is slightly above the 5% maximum I like to use,
but in cases like these where the logical pattern stop is just outside
my max risk (5%), I’ll use the pattern stop and possibly reduce shares
traded. Also, being a volatile stock, I’m more inclined to use a
somewhat looser stop (see my article: “The
Myth Of Tight Stops”
for more information here).  Today,
the stock begins to drop and reaches our initial profit target of 3.30
points (our initial risk). Therefore, we lock in half of our profits
at that juncture (c) and more our stop to breakeven on our remaining
shares–the same as our entry(d). This way, barring overnight gaps
against us we have, at worse, a breakeven on our remaining shares and
a chance to hit a home run through trailing stops. For more on money
management and position management, see my (and my compadre’s)
articles under Traders
Lessons
.

Mystery Revealed

On Tuesday night, I
published a “mystery” stock.  My goal was to see how
you would analyze the market analyze the market from another angle.
And, by removing the symbol, I wanted to see if you viewed price
action differently from an individual “stock” than the
overall market. This made for some very interesting and well-thought

out

discussion on the message boards. I admit, I too learned quite a bit.
Check out the discussion here if you haven’t already done so.

BTW, I’m
surprised
many
of you didn’t know that TradingMarkets had message boards. Click on
the TMWORLD tab on the home page or click
here
to go to them.

Best of luck with
your trading on Friday!

Dave Landry

sentivetradingco@prodigy.net

P.S. Reminder: Protective stops on
every trade!

“…Your
book is organized, concise and well documented in your charts. It is
an easy read for a great system..”

Eric L. 

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