What Bounce?
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
markets opening. Therefore, overnight events may alter the
outcome of these observations.
The Nasdaq lapped slightly higher on
Tuesday’s open (a) but quickly found its
high (b). Then after some Greenspeak drifting, it resumed the sell-off and closed on
its low (c).
This action
creates an outside day down.
Tuesday’s action is typical of
this bad environment: just enough hope to draw you in before reversing. This is
why I have been droning my “keep it light” mantra for months now.
When will it be time to press? As soon as the market begins to show signs of follow
through from one day to the next. For now, it can’t even hold intra-day trends.
So what do we do?
There are few setups on the short side as most of the stocks in downtrends remain
oversold. On the long side, you guessed it, keep it light.
Looking to potential setups,
Advanced Micro Devices
(
AMD |
Quote |
Chart |
News |
PowerRating), mentioned recently, is now a low volatility
situation (a). Watch for a potential breakout to the upside as volatility
reverts to its mean.
Standard Pacific Corp.
(
SPF |
Quote |
Chart |
News |
PowerRating), mentioned Monday night and on the Pullbacks
Off Highs List, appears to be resuming its trend out of a pullback.
On the short side, Alexion Pharmaceuticals
(
ALXN |
Quote |
Chart |
News |
PowerRating), mentioned recently
and on the Pullbacks
Off Lows List, is consolidating at lower levels and looks poised to
make another stab lower.
Take ’em If You Got
’em
Cabot Microelectronics
(
CCMP |
Quote |
Chart |
News |
PowerRating), mentioned Monday night,
provided a wonderful money management example on Tuesday. The entry, 1/16 above
the prior day’s high (a), is triggered soon after the open. Because the low of
the setup is so far away, an initial protective stop is placed at 79 3/4 for a
risk of approximately 5%. This gives us an initial profit target of 88 3/8. The
stock rallies sharply and hits our target (c). We exit half of our shares and
move our stop to breakeven, the same as our entry (a). We then get knocked out
for a scratch on those shares. As you can see, without money management,
this would have been a losing trade. Money management is vital, especially in
this poor environment. Use protective stops, take profits and trail stops. For
more information, read my money management articles under Trader’s Lessons.
One more point, in pullbacks, when the stock reaches the old
highs (d) it either stalls out (hence a potential double top) or breaks through
(a breakout). The problem is, you don’t know which one it will be until after
the fact. Therefore, whenever the old highs are approached, its a good idea to
lock in a piece.
Best
of luck with your trading on Wednesday!
P.S. Reminder:
Protective stops on every trade!
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