The Last Good Trade: Google
Buying weakness and selling strength is the oldest–and wisest–way to make money trading stocks. And it’s true whether you are betting on stocks to go up or stocks to down–as was the case of what we think was The Last Good Trade in Google.
We didn’t take this trade in Google. But the trading methods described here as applied to a simulated trade of Google are the same methods that we used every day in our TradingMarkets Battle Plan for Stocks. See for yourself what our approach to short term trading is all about and if you like what you read, consider treating yourself to a free trial.
Google
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PowerRating), which announced earnings Thursday afternoon, has been trading below its 200-day moving average since late January. This marks Google as a weak stock from a short term trading perspective. While we like buying weakness in stocks, the weakness we want to buy is the weakness of strong stocks that are pulling back. By strong stocks, we mean stocks that are trading above their 200-day moving averages.
So if you can’t buy a stock’s weakness, sometimes you can sell that stock’s strength. With weak stocks, our approach to trading is to sell them when they bounce from time to time, showing the sort of temporary strength that happens in all weak stocks as they move lower toward their eventual bottoms.
How do we know if a bounce is worth selling? We use the 2-period Relative Strength Index (RSI), an indicator we modified years ago to increase its effectiveness for short term trading. The 2-period RSI tells us if the stock is oversold or, as in the case of a weak stock experiencing a bounce, is overbought.
When the 2-period RSI climbs above 90, we believe we have an overbought stock. When that stock is also trading below its 200-day moving average, we often have a trading opportunity to the short side.
That opportunity appeared on Wednesday, April 2, when Google closed at 468.40 and its 2-period RSI popped above 90. In the same way that we like to buy stocks on intraday weakness, we believe in selling stocks short–or buying put options–based on intraday strength.
Anywhere from 2% to 6% above the previous close is enough for us to get the sort of intraday strength that helps ensure that our entry is as high as possible. Again, if you can’t buy low and sell high, you can always sell high and buy low.
Let’s take the minimum of that entry range, the easiest possible entry at 2% above the April 2nd close. That would allow for an entry at 477.77 or higher.
Two days later, Google rallied as high as 477.83. Had this been an actual trade, we would have been locked, loaded and ready for our exit.
When we buy, we exit on the stock’s show of strength in a close above the 5-day moving average. So when we sell short, we exit on the stock’s show of weakness in a close below the 5-day moving average. Buy low, sell high. Sell high, buy low.
Yesterday, Google closed at 458.80, more than a $1.50 above its 5-day moving average. A trader who had pursued this trade and was following that signal could have exited on the open of the following day–this morning–at approximately 455.64, some 22-odd points below the suggested 2% entry.
Again, we did not take this trade in Google. This morning we gave subscribers to the TradingMarkets Battle Plan for Stocks seven exits from positions held over the same period of time as this simulated Google trade. For traders who entered positions with that same 2% below the previous close, all seven trades were profitable.
We can’t promise to bring subscribers to the TradingMarkets Battle Plan for Stocks this kind of performance every week. But what our subscribers can count on is the very best in short-term trading opportunities based on more than a decade of quantified, backtested model trades involving millions of stocks.
Every day we’ll provide you with incisive, before-the-bell commentary and analysis on the day’s markets to help put your trading in context. We’ll give you suggested entries and exits for trade opportunities that may be only hours away. And we’ll give you what many other people can’t: model-driven percentages so that you know the historical win rate going back to 1995 for every single trade idea–long and short.
Give the TradingMarkets Battle Plan for Stocks a read before the next market open. Click here to start your free, one-week trial subscription or call us today at 888-484-8220. Come see what the TradingMarkets approach to trading can do for you.
David Penn is Senior Editor at TradingMarkets.com.