Using The Order Book Can Give You An Edge, Here’s How

This morning I felt that MRK would be active.  It was at the top of my radar
list.  When MRK was indicated to open down between 50 cents and 95 cents, I
placed a market order to cover my existing short on the NYSE open.  I was
covered on the opening print at 27.20.

At this point I became a buyer, anticipating a bounce to Friday’s close at
$28.00.  This goes back to the dilemma I have written about earlier of fighting
the trend on a stock that has a gap down on the open.  Even though I was looking
for the bounce, I realized that there had been potentially bad news for Merck’s
profits.  The #1 trade would be to go short through the day low of 27.20.  I
went long and short a number of times for little or no success.  In the trading
industry, this is known as “chop”.  Chop can be very frustrating to new traders
and test even the most seasoned trader’s patience.  I understand that chop
occurs, but to be present when the move finally occurs, a trader must continue
to probe until a clear pattern emerges   When MRK failed to break the day low
for the third time. I covered all shorts and went long at 27.30.  I was rewarded
with a fast move up to 27.75 where I exited all of my long position.  I decided
to step aside and take a breather and observe the price action.  MRK entered
into a range between 27.50 and 27.75. As the range continued, I decided to sell
short at 27.60 with a stop of 27.85.  I took this trade in anticipation of MRK
testing the current low of the day.  If and when MRK does test the low I would
add to my short position in anticipation of a break.  Unfortunately I was s
topped out of MRK at 27.85, but when I was s topped out I was able to identify a
large Bid in the NYSE openbook and went long a few thousand shares for .10
gains.  At the close there was a large offer at $28.00 in the NYSE openbook. 
This is definitely a large resistance point since MRK closed at or around $28.00
on Friday as well as today.  I will definitely be looking for MRK to break down
from the $28.00 mark tomorrow and hopefully breaking the day low of 27.20.  If
this does not happen and MRK looks to be strong I will look for MRK to go up
through the $28 and gain some of the loss from Friday.  My “A” trade is
definitely being short when the opportunity presents itself.

While I was trading MRK, ALO came up on my alerts as a 5 day high. The news
service was highlighting it as “moving up quickly”.  I looked at
(
ALO |
Quote |
Chart |
News |
PowerRating)
charts very quickly and did not see any danger signals.  I also had enough
confirmation in the NYSE openbook to identify buyers in the market. I went long
at  $22.00.  I was ok with this because there was the buying strength, great
chart pattern, near its 52-week highs and the “trend is my friend”.  I noticed
that there were an increasing number of large bids showing up in the NYSE
openbook so I placed buystop order to buy more ALO at 22.30, 22.75 and 23.00.  I
should have added more at 23.50 and 24.00 but I felt I had a large enough
position for the manner in which ALO was trading.  Each time I went long I
followed up my new entry point with a trailing .10 stop loss. I eventually got
stopped out of ALO at 24.24 on 3k shares.