Under The Hood
Each evening we focus
on the most interesting aspects for the upcoming trading
day. The comments are based on observations of the nightly
updates of the Stocks/Sectors and Market Bias pages. They
are provided for educational purposes only and are not
intended to be direct trading advice. Also, keep in mind
that these remarks are made up to 12 hours in advance of the
market’s opening. Therefore, overnight events may alter the
outcome of these observations.
On
Monday, the Nasdaq lapped higher on the open (a) but quickly found high and sold
off for a trend day lower. This action has it closing near the lows (b). Â
3,000-ish and the 50-day simple moving average remain likely
resistance (c).Â
The
fact that 2,600 held once again is encouraging, but, based on the reversal from a
pop-up opening, we’ll have to score the overall day as a negative.
Judging from the recent emails regarding bottom fishing, I
thought now might be a good time to review my trading style. I believe that the
trend is my friend. Once I identify a strongly trending market, I then
look to enter on some sort of setup, usually a pullback. Most of the time, my
entry (assuming a long position) is just above the prior day’s high. If the
market doesn’t trade above that high, then I ignore it. If I get an entry, an
initial protective stop is placed below recent support–in most cases the low of
the setup. If this is more than 5% away, I’ll risk a maximum of 5% and/or
possibly reduce my position size. I then look to scale out of at least half of
my position as soon as my profits are greater than or equal to my initial risk
and move my stop to breakeven (the same as the entry). Therefore, if I am
risking 2 points, then I will look to exit at least half on the first 2-point
rally. If not stopped out, I then trail a stop higher on the remaining
shares, usually below the prior two lows. Unless the trend is extremely strong,
I’m normally out of the remaining shares over the next two to seven days. Most
of the above is covered in detail under Trader’s Lessons.
Let’s walk through an example. As always, keep in mind that
this site is educationally oriented (vs. direct investment advice) and I am
presenting this as an example only. With that said, Toll Brothers
(
TOL |
Quote |
Chart |
News |
PowerRating) has been in a strong trend as of late and has recently begun to pull
back. The fact that recent support held (around 38, see Friday’s commentary)
suggested that the stock had the potential to resume its uptrend. An entry was
triggered on Monday (a) at 40 1/4, 1/16 above Friday’s high. We
immediately place an initial protective stop at 38 3/16, 1/16 below the low of
the setup (b). This gives us a risk of 2 1/16 points and an initial profit
objective of 42 5/16 (the entry, 40 1/4 + the initial risk of 2 1/6). This
profit target is achieved (c) and we exited half of the position. We then move
the protective stop on the remaining shares to breakeven–the same as the
entry (a). Therefore, barring overnight gaps, the worse we will do on the
remaining shares is breakeven with the potential to capture larger gains.
As you can see,
my methodology is fairly straight-forward with an emphasis on money management.
On Tuesday, I’ll expand further on why money management is so important.
Back to the markets.
The action in the Nasdaq is somewhat disappointing as is tech in general. It
seems like the institutions are doing some window un-dressing–getting rid of
former darlings, such as Cisco
(
CSCO |
Quote |
Chart |
News |
PowerRating). The good news is, the “under the
hood” action is encouraging. As mentioned recently, more and more stocks
are beginning to set up on the long side. As I tool through tonight’s
indicators, I’m seeing construction, banks, financial, and some biotech either
breaking out or setting up. It’s still too soon to bet the farm (see
Friday’s commentary for more about the farm) but this action is encouraging.
Therefore, continue to nibble on the long side and consider a short or two in
tech.
Looking to potential
setups, Scios
(
SCIO |
Quote |
Chart |
News |
PowerRating) and Genzyme
(
GENZ |
Quote |
Chart |
News |
PowerRating), both mentioned recently and
both on the Pullbacks
Off Highs List, still look like they
have the potential to rally out of pullbacks
Neuberger Berman
(
NEU |
Quote |
Chart |
News |
PowerRating), mentioned Friday
night, still looks like it has the potential to resume its uptrend. Just wait
for follow-through (i.e., an entry, see above) as it did close poorly on Monday.
On the short side,
Navistar
(
NAV |
Quote |
Chart |
News |
PowerRating), mentioned Friday night, still looks vulnerable.
Best
of luck with your trading on Tuesday!Â
face=”Arial, Helvetica”>Dave Landry
P.S. Reminder:
Protective stops on every trade!
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