TradingMarkets Danger Zone: AMZN, GRMN, SNDK, WBMD
Does looking to sell after a market rallies 400+ points make you a spoilsport–or just a smart trader?
The reversal we are seeing in the markets here on Friday, two days after the Dow staged an impressive 400+ point rally and one day after the markets made a dramatic, intraday reversal off the lows, is just another reminder that it pays as a trader to do the uncomfortable thing rather than the comfortable thing.
In the same way that it would have been easy for traders to let their gains ride after Wednesday’s sizably bullish session, veteran traders know that when markets such as these are under pressure, it is better to shoot first (i.e., take profits) and ask questions later. While markets are in strong uptrends, moving up and away from their 200-day moving averages often allow traders to buy both breakouts and breakdowns, when markets are lagging and susceptible to weakness, a more exacting discipline is required.
We outlined this discipline last year, just as the correction was beginning, in an widely read article for TradingMarkets.com called, “5 Mistakes to Avoid in a Market Trading Below its 200-day Moving Average,” by TradingMarkets founder and CEO Larry Connors. Among the five points that are outlined in that article, one key mistake stands out: buying stocks that are below their 200-day moving average.
It sounds simple. But when markets are rallying powerfully off of major lows, the temptation to buy stocks, especially popular, well-known stocks that have become much cheaper in dollar terms, can be a massive temptation indeed. Unfortunately, it is a dangerous temptation to succumb to. Our research into short-term stock behavior revealed that there simply is no edge in buying stocks below the 200-day moving average when the broader markets are similarly trading below their 200-day moving averages. It is the functional equivalent of buying a bad house in a bad neighborhood.
All four of today’s stocks have the kind of glamour appeal–and in some cases, outstanding past performance–that make them the kind of stocks that investors love to own and traders love to trade. But with their low PowerRatings and location below the 200-day moving average, this quartet of big name stocks is probably best avoided for the time being. There are far better options for short term traders right now–even if those options don’t have the flash of these increasingly dangerous-to-own four.
Amazon.com
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Garmin
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SanDisk
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WebMD
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If you are looking to take your trading to the next level, then consider grabbing a copy of our special, Free Report on short-term stock trading: “5 Secrets to Short Term Stock Trading Success.” This report will clue you in on the most important principles and best practices that short-term traders have used in order to make money from the inefficiencies and mispricings that appear in the stock market every day. Click here to get your copy of “5 Secrets to Short Term Stock Trading Success” or call us today at 888-484-8220.
David Penn is Senior Editor at TradingMarkets.com.