To trade these 3 oil driller setups, you have to be quick and proactive

September 1, 2005
Dave Floyd

Dave Floyd is a professional FX and
stock trader based in Bend, OR and the President of Aspen Trading Group. Dave’s
approach to FX combines technical and fundamental analysis that results in
trades that fall into the swing trading time frame of several hours to several
days. To learn Dave’s HVT system,

click here.

You can say two things about today’s session:
it offered plenty of set-ups, but you had to be quick and very proactive in
determining which sectors and stocks where rotating in and out of favor – no
small task in an environment that is rather volatile. A quick summary of
what we would consider the timeline for the sectors that came and went would be
as follows:

Now, let’s be realistic, day traders are most effective when they are honed
in on a few stocks or an index and tape read it to death in order to compliment
the technical analysis that most traders apply. We know that technicals alone
are sometimes inadequate, hence staring at price action is a requirement. This
presents a problem on a day (like most days) where sector rotation was rampant.
Unless you are proactive in trying to determine what sectors/stocks are coming
on and which are fading you will suddenly be left with no follow through on the
stock you are currently trading and will be an observer of the next sector that
the big money is chasing. However, by ‘scanning’ charts looking for the next
hot sector you degrade your tape reading ability in order to make an effective
trade.

Luckily, today’s computing power can offer traders many software tools that
can help you determine where you should be trading and maybe even what stocks to
trade. This software of course is but one piece in a traders toolbox, but one
that I cannot be without. It is simply not possible to manually process my
trade parameters by going through a list of stocks – it is far too time
consuming. So while I am dubious of software that tells you when to buy and
sell (I will politely decline comment) having software that helps you in your
decision support process is invaluable.

Here are the parameters, that when met, I like to be made aware of:

1. High velocity reading – velocity is a term I use that
characterizes the price action in a stock. I am keen to know about stocks that
are moving far more rapidly relative to the rest of the universe of stocks that
are HVT eligible. (click
here for more on HVT trading)

2. Solid technical picture – in essence, show me stocks that meet my
trade set-up requirements on a 1 and 5-minute chart. For example stocks pulling
back within an uptrend that have a bullish stochastic. Vice versa for shorts.

3. Fib gauge reading – show me stocks that are remaining strong in
market sell-offs, and weak during rallies. If a stock has pulled-back less than
20% of the days range despite a market (S&P’s) that is off more than 50% of the
days range or making new lows, I want to know about it. That stock will likely
move higher on even a modest bounce higher in the market, especially if it meets
the above requirements as well.

4. Hot sectors – show me the sectors that are moving far and away
better relative to other sectors and the market as a whole. An index with a
high velocity reading will get me attention.

5. Reversals – while for the most part I am a trader who adheres to
the prevailing trend (on a 1 and 5-minute basis) I also recognize that when a
stock falls or rallies hard and fast, it will likely experience mean reversion.
These trades can be tricky, but also lucrative.

The charts below illustrate some trades from today that were identified by
using one or a combination of the above parameters.

Reversal Trade

Note the Retail Index
(
RLX |
Quote |
Chart |
News |
PowerRating) chart at the same time as this BBY
trade took place – great lead indicator

High Velocity Reading

While the chart of
(
NE |
Quote |
Chart |
News |
PowerRating) below denotes 2 shaded areas that represent conducive
price action (high velocity) by no means were we able to get in in the early
stages of either of the moves. However, we knew about these stocks within 3-4
minutes of the move being made. Also note the Oil Service Index
(
OSX |
Quote |
Chart |
News |
PowerRating) at
this time.