Two Things To Remember

January 2, 2003
Dave Floyd

Happy New Year.Â I trust that the holidays were safe
and enjoyable.Â Â

As we start yet another year, questions arise:

Will the major indices post gains to break the three-year losing streak?

Will “extreme” volatility come back?

How will you navigate/trade the present trading environment?

I do not have the answers to questions 1 and 2, and even if I did, the
answers would do little to assist me or you as it relates to trading.Â The only
question which I feel deserves any attention is #3.

For me, as well as many of you who were so used to playing the intraday
volatility on one- and five-minute bars, we have had to adjust our approach to
the market in recent months.Â In fact, regardless of the time frame you trade on,
EVERYBODY has had to make adjustments.Â Call it a thinning out process. You
either adapt and fine-tune your approach, or beat your head against the wall
trying to put the square peg in the round hole.

As I had mentioned a few weeks back, after arriving at the decision that
waiting for volatility to come back was simply not an option, I have actually
found that the current market environment has forced me to really fine-tune my
approach.Â All, and I mean all, of the skills I have acquired over the years
navigating the zigs and zags day in and day out are now being utilized to simply
push my time frame out to the next level.Â Five- and 15-minute bars have now
replaced one- and five-minute bars.Â As Don Miller mentioned a few weeks back,
the current market does not require wholesale changes to your approach, rather
minor adjustments or perhaps even just lower expectations in terms of total
return.

While I agree that as you are finessing your approach, lower total returns
may be unavoidable, I do think that if you look beyond that initial period, you
will come to the same conclusion that I have:

This period in time offers traders an immense
opportunity to round out and take your expertise to the next level.

Here we are entering year four of a bear market, and if you are reading this
column, you should give yourself a pat on the back.Â The worst market environment
in recent memory has not sent you packing your bags.Â What does not kill you will
only make you stronger.Â That being said, the ability for me to “play” on a
slightly longer-term time frame has immediate benefits:

It will allow me to stay in the game, while simultaneously learning some
new skills.

If volatility comes back, I will then have a new set of skills which
worked well in a quiet market that should allow me to clean up when volatility
does come back, which will at some point.

I still have the ability to crank up the HVT trades when those
opportunities arise.

In essence, this period of time is allowing you to grow as a trader.Â For me,
that growth path will be taken one step at a time.Â I cannot expect to go from
HVT to multi-day swing trading and expect
the same success.Â They are two completely different playing fields and require
vastly different skill sets. However, by moving one step at a time, I have built
a perspective on the market that allows me to quickly play whatever
opportunities are being offered.

I have said this to many traders over the years.Â The skills that are
required to be a great HVT trader are 100%
transferable to any other time frame. Patterns and dynamics repeat almost
identically, whether it be a one-minute chart or a daily or weekly
chart.Â Learning from square one will allow you to build an incredibly strong
foundation.

Now that that is off my chest, let’s take a look ahead to today, and come up
with some sort of a game plan in order to capitalize.Â The markets have been weak
in the last half of December, once again showing that the so-called experts on
CNBC and the like do not have a clue in terms of forecasting.Â This weakness
during a traditionally strong time casts an ominous tone going into the new
year.Â Coupled with some negative economic numbers (housing and consumer
confidence), higher prices seem a bit unlikely.Â Nonetheless, we are only
concerned about what may happen today and how we can capitalize on it.Â Take a
look at the chart below.

While I cannot say with any degree of accuracy which way we will trade today,
based purely on my experience and observations, a move higher (albeit brief)
seems likely.Â Look for a move to 894 if that does happen.Â This level should
offer a ceiling on the move.Â However, any meaningful bounce off of the 869-71
area should offer a good opportunity for those who have longer-term positions
(shorts) to cover and lock in gains and perhaps even go long since these bear
market rallies can have legs.Â Â

So based on a modified approach to trading, what exactly do you need to be
focusing on?Â The same principles that I have been discussing for the last year
and a half.

1.Â Trade with the trend.Â Is the moving average on the 1 or 5 minute chart
(depending on which one your are using as your leading indicator) sloping up or
down?Â Forget about net change, how much the Dow is up/down etc.

The Up Arrow indicates a market that is
an up-trend

The Horizontal Lines indicate a market
that has no trend at this point in time

The Down Arrow indicates a down-trend

You need to be able to quickly change your assessment of the market in order
to effectively trade it.Â

2.Â Trade stocks closely correlated with the futures.Â Typically when looking
for stocks I was always wanting the stock that moved tick for tick in order get
the most performance.Â However, in light of pushing my time frame out, I want
look for stocks that are correlated, but perhaps not as volatile.Â Something
that is very liquid, but perhaps a little slow is an ideal way to adjust to this
new time frame.Â Stocks like TYC,
AOL are good candidates versus a stock like
IBM.Â Walk before you run.

Go back and review some of the trading lessons I have written as well as
reading my book which will be out within a few weeks.

Based purely on the chance that there is some sort of a rally for the first
few days of the year, the stocks below are poised for nice gains for those
willing to hold for a few days or longer.Â My overall outlook for the market is
bearish, so these are purely ways to play the corrective moves, not anything to
fall in love with.

Conversely, gold stocks have come very far, very fast.Â
A rally in the overall market will put pressure on these stocks compounding
their weak technical picture and short-term overbought condition.Â These stocks
represent not only decent multi-day set-ups but also an ideal way to play
intra-day moves in the S&P’s and Nasdaq.Â Typically they will be great
contra-traders.