Today’s Trading Lesson From TradingMarkets

The trend is
your friend. I have traded it, used it and coaxed profits from it. To
the charge of being a trend-following moron, in the words of my friend
Dave Landry: “I plead guilty.” However, what does a daytrader do when the market
is suffering through a day that can’t seem to find a trend, and chops around?
Following the trend is great, but people — long before I was around — figured
out the market only trended around 60% of the time (30% up and 30% down). What
do we do for the other 40%? Sit out? I suppose that could be an option, but why
would you want to sit out when there are ways to pull money out of markets like
these, if you know what to look for? In this lesson I will show you the
systematic plan of attack that I use for finding these hidden gems when the
market is lacking momentum.

Being “Where the
Action Is”

For a daytrader, this is always of
paramount importance, but it becomes even greater when a choppy day comes up.
Many who have read prior lessons from me know I like to look at stocks with a

3-month relative strength ranking of 80-99 for long side candidates and a

3-month relative strength ranking of 1-20 for possible short issues from the
TradingMarkets.com Stock Scanner. But on days that can’t seem to decide where
they want to go, intraday relative strength or weakness is more
important. Why is a stock up 2 or 2 1/2 points, when the market slowly grinds?
It could be on news, could be due to an analyst upgrade, etc. It does not really
matter why. The fact that it is moving higher or lower while the market is
undecided is telling you something.

How Do You Spot
These Rockets When They Launch?

The
TradingMarkets.com Nightly Daytraders Report

Every night, a new feature on the
TradingMarkets.com site hands you names with the potential for continuation to
both the long and short side. It is our new

Nightly Daytraders Report, and it is full of stocks that could prove
fruitful the following morning. In it, we rank stocks with high short-term
relative strength that closed in the top of their range, suggesting
follow-through over the next one to three trading days, as well as equities with
weak short-term RS that could continue to the downside. In addition, we point
out stocks with high RS that showed a last-hour surge in volume, as well as
stocks ending the session in Slim Jims that could develop into another trade the
following day.

What this gives you as a trader is a
powerful list for you took look at, when you sit down at your trading desk the
following morning. While certainly not all these names follow through, this
gives you an important heads-up as to who the leaders and laggards may be, when
the momentum awakes from the doldrums.

Here,
Computer Sciences Corp. (CSC)
appears on the list, as it has a three-month RS rating of 84 on

Nov. 2, ends the day in a Slim Jim and exhibits an expansion breakout on a
surge of more than 500% of the average daily volume. The following trading
session, the stock explodes to the upside — giving the daytrader an explosive,
profitable move.

CSC runs up more than 2
1/2 points right from the get go, after another momentum gap higher.

Another example from the
Nov. 2 list, XL Capital (XL),
makes the cut by holding a three-month RS of 87 and closing in the top of
its range.

The stock gaps up in the
following session, but then proceeds to head straight down. However, it then
rallies over an angular triple top/triangle and runs up 1 1/2 points to its
intraday high.

The stocks from this list
do not always move right away, but if you have the patience and the focus to
monitor them throughout the day, you will be ahead of the game when they decide
to make their move.

TradingMarkets.com Market Bias Indicators

Another tool that can
help you gain an edge in markets with unsure or undecided chart bias is the

Market Bias Indicators. Here you will find VIX reversal signals I, II, III,
V and VI, the McClellan Oscillator, TRIN Thrust, CHADTP and the
TradingMarkets.com Proprietary Momentum Index Indicator. These signals are
updated nightly and give you a good indication as to the probable slant to next
day’s trading. These indicators are not stand-alone signals and should not be
traded as such, but they do give you a solid platform from which to approach the
following day, particularly when you get multiple signals pointing in the same
direction.

Spotting Momentum Intraday

One of the quickest ways to spot
stocks moving is to utilize the point gainers and point losers feature in your
charting package. Most charting software has this feature to alert you to the
biggest point gainers and losers, either by exchange or simply all together.

 

(Biggest point
gainer and loser quote windows. Courtesy of Quote.com)

These windows will show
you what is moving up or down, immediately. From here, you simply go to the
charts and see if a particular stock is setting up for a likely entry.

Here,
Engineered Support Systems (EASI),
is showing three consecutive higher closes on the daily chart when it appears in
the quote window on Oct. 30 and gives the daytrader three potential entries —
trade through above the prior high, a pullback and a Slim Jim.

Cabot Microelectronics (CCMP)
is another big mover that
appears in the quote window on Nov 1.

The
Nasdaq Composite ($COMPX)
is choppy and undecided early, then rallies upward for a solid trend day.
This gives the impetus to push CCMP higher out of its late-afternoon Slim Jim.

Not
For The Faint Of Heart

It must be said this
method is not without risk, and any of these methods utilized should be in
conjunction with tight stop-loss protection. The position should move in your
favor almost immediately. If it does not, get out. When trading in a choppy
environment, flexibility is the key. You will get stopped out of some positions
and be forced to re-enter, sometimes in the other direction.

Here the
Nasdaq 100 ($NDX.X)
can’t decide which way it wants to go. It forms a Haggerty 1-2-3 top, yet
seems to just drift sideways in a channel. About 90 minutes later, it breaks out
above the channel/triple top, but not before making one last bleed back into its
range. Traders who recognize this action can profit when the market finally gets
its sea legs.

In conclusion, there is
no reason to sit on the sidelines when the indices as a whole are undecided
about where they want to go. If you do your homework, prepare yourself the night
before, have a plan when you sit down at your desk in the morning, and focus on
where the action is during the day, you are on your way to being successful.
When you know where to look, you can uncover stocks moving up and down on any
day. With proper money management, you lessen risk while increasing your equity
curve on a difficult day.