Why Distortion Can Be Good
As I have been saying for several columns now,
selectivity and patience are the keys to navigating this market. Last week I
mentioned that I had been using Bollinger Bands as a way to assist me in
identifying high-probability setups. When you combine that approach with opening
price “distortions,” you get a powerful approach.
Take a trade from Hewlett Packard
(
HPQ |
Quote |
Chart |
News |
PowerRating) yesterday. Â
Yes, it bucks the overall rule, trade with the trend, but especially on the
opening, rules need to be broken. After the opening though, I never go against
the trend.
The key thing about this trade (long) was that the S&Ps opened stronger
(relatively), and as a result of the break outside the Bollinger Bands, you now
have two powerful reasons to initiate the trade. Given that you are bucking the
trend, these are trades that you do not want to fall in love with. You are
simply there to take advantage of the “overreaction.” A good rule of thumb is
that the 20-period EMA will be tough resistance or support. Never expect a move
above/below. I always exit the position ahead of that level or when the
“corrective” momentum slows, like it did in HPQ yesterday.
A colleague of mine showed me this chart yesterday. It simply depicts the
current low-volatility environment. Notice how the
Average True Range (ATR) of the S&Ps has been on a decline for some
time. When the market is like this, it is best to tread lightly. The
ATR was not even this low just before the
July 2002 fireworks. I am hopeful that an even more explosive period of
volatility is upon us. It seems logical to assume that a resolution with Iraq
would be the catalyst.
Many of you ask, “If you are only active during the opening hour, what do you
do the remainder of the day?” I usually will have a couple of intraday positions
working. Naturally, these trades last much longer than my bread-and-butter
scalps, but with “drip” price action, I am usually able to pick up gains over
the remainder of the day. For today, I am keeping a eye on these potential
longs:Â [BGEN|BGEN]
and
(
VLO |
Quote |
Chart |
News |
PowerRating). On the short side,
(
BRL |
Quote |
Chart |
News |
PowerRating).
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| 859 | *1020* |
| 854 | 989 |
| 847 | *985* |
| 839-40 | 980 |
| 830 | 975 |
| 820 | 970 |
| 814-15 | 955 |
| 808 | *933* |
| 804 | Â |
Tomorrow I will share some longer-term themes I am keeping an eye on. With
the markets quiet, it is an ideal way to put your portfolio in order and
position accordingly.
As always, feel free to send me your comments and
questions.