Seven Steps To Beating 99% of Wall Street

• January 3, 2002
• TradingMarkets Editors

12-3-2001

10:20:17

Autozone (AZO)
is continuing to trade in a low-volatility, high level triangle. AZO is
currently down 0.65 to 66.65 and is holding a

3-month relative strength ranking of 93 from TradingMarkets.com.

In this example from December 3,
TWI had been tracking Autozone
(
AZO |
Quote |
Chart |
News |
PowerRating) for several days as it
contracted into a high level, low volatility situation. We know that this is
likely to result in an explosive move, we are just unsure of the direction.
We are also aware that AZO is due to report earnings on December 4, which
will likely trigger the move. When AZO reports an increase in earnings per
share of 65% after the bell, the stock explodes to the upside the next
morning.

 

Subscribers could have taken
advantage of the move using an options straddle in this manner. Since the
direction is not easy to determine, a trader could have bought an equal
number of 65 calls and 65 puts while the stock was trading sideways. Then,
as the stock broke out, sold the puts to recoup some of the premium, then
either sold the calls near the end of the day, or place a stop on the
position to lock in profits and take a chance on furthering his or her
gains. Or, daytraders had four opportunities to catch moves as the stock
rallies out of pullbacks over the course of that morning’s session. The
stock is exploding on the news, so an aggressive trader with a tight stop
could have entered during the trending phase of the session at any one of
the entry points shown below.

 

 

12-12-2001

12-03-2001

11:17:02

Broadcom (BRCM)
is pulling back from its recent high. BRCM is currently trading 1.47 to
42.52 and holds a

3-month relative strength ranking of 95 from TradingMarkets.com.

Traders who are alerted to the
pullback look at the daily chart and note the strong uptrend. They are able
to enter on December 4 at 43.91 as the stock makes a new high out of the
pullback, and place the initial stop at 41.95, 0.05 beneath the entry day
low. This insures a loss of around 2 points in the event the trade moves
against them. As the stock moves 6 points higher in the next two trading
sessions, with trailing stops, traders are able to lock in a substantial
gain before it reverses on day number three.

 

How can traders benefit from
this knowledge? Look at December 11. As Merck
(
MRK |
Quote |
Chart |
News |
PowerRating) dropped an
earnings bombshell, the stock went into free fall.

 

 

TWI goes on to report that this
is also most likely going to affect the drugs, like Bristol-Myers
(
BMY |
Quote |
Chart |
News |
PowerRating)
in addition to the healthcare sector
(
$HCX.X |
Quote |
Chart |
News |
PowerRating), which all
take a hit over the course of the day as Merck drags them down with the
negative news.

 

TWI subscribers were able to be
where the action was over the next two days, alerted well in advance of what
could happen. This results in major edges for traders who are able to
position themselves ahead of the masses.

 

 

Follow the steps. Take nothing
in the form of a setup or stock news at face value. The pattern takes shape,
then launches a rocket. This allows traders to take advantage of the
futures, E-mini, or QQQ’s
(
QQQ |
Quote |
Chart |
News |
PowerRating) to profit from the move.

 

Aggressive, early traders will
possibly enter as the futures contract or QQQ’s move above point three,
again with a tight stop. More cautious traders can take the trend entry
above swingpoint number two. When entering in a trade like this one, tight
stops are important due to the fact that if it fails, the result is often a
large move against you. Employing a tight stop will protect you in the event
you are wrong.

Many times these patterns will
enable you to get in to a major move before it gets pushed up. With either
early entry above point three or later entry above point two with a tight
initial stop you protect yourself against major risk, you can ride home runs
like this higher by getting the information quickly via the chat channel.

Java Applet Alerts

 

Here is a recent example in
Aviron
(
AVIR |
Quote |
Chart |
News |
PowerRating). After a breakout from a range and a strong push
higher, the stock generates an alert when it pulls back 10% from its prior
high. Swing traders could enter the next day when the stock makes a new high
out of the pattern, place a protective stop and take advantage of a move of
more than 4 points as it resumes its uptrend out of the pullback.

Here in the above chart of
CDW Computer
(
CDWC |
Quote |
Chart |
News |
PowerRating), an alert is generated when CDWC pulls back and
touches the 20-day moving average. A look at the chart show the stock in a
strong trend and in the midst of a pullback. When the stock resumes its
uptrend it runs upward for more than six points. When you see an applet
alert on a stock you are interested in, always look at the chart for a
pattern or another indicator that may tip off the potential direction of the
future movement.

 

 

Emulex
(
EMLX |
Quote |
Chart |
News |
PowerRating)
is an example of how daytraders can take
advantage of alerts that occur during the session. EMLX comes across the
wire when it goes net negative after being positive for most of the first
hour. The daily chart is showing the stock is pulling back for a three day
period. A short pullback in the midst of its knife to the downside allows
traders to enter when the stock makes a new intraday low, and catch more
than 1 point in a matter of minutes.