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July 8, 2009: NASDAQ Outlook & Key Trading Levels
Taken from Steve’s Timely Trades LetterTM
The market was down nine points on well below average volume during Monday's session. On Tuesday the market moved down forty one points on below average, but increasing, volume. Wednesday's session saw the market move down below the lower Bollinger Band, and then snap back to close up a point on strong volume. The market usually sees the Bollinger bands as support/resistance in a trading range environment, so Wednesday's drop below the band and snap back was normal behavior. The day also formed a nice hammer pattern which is common around the lower band.
We saw a lot of action in both our long and short setups last week. This week we saw a dozen of the short setups trigger, everything from a five dollar move in RIMM, to a ten percent move in PXP, or the eleven percent move in CNH. The trading plan was to look at a couple of short positions if the market dropped below the 1770 area. The market broke support on Tuesday, and there were plenty of short triggers to choose from. I was only looking for a few short positions because of the low volume in the market. If the drop this week had come on high volume, I would have taken more short positions. Low volume moves lack conviction and can reverse quickly, so I do not want to be loaded up on shorts until the market shows this move is serious.
Last week we noted that the market itself may not be moving much, but there was a lot of action in the individual setups. This week the action continued with all but a couple of our short setups triggering, and the market itself was also on the move. Interesting how the 'action under the hood' noted in the last Letter led to the market moving a few days later. It is a good idea to keep an eye on what kind, and how many, setups are triggering.
When the market dropped below the lower Bollinger Band on Wednesday I took profits on most of my short positions. I had expected to hold them longer; but I react to what the market is actually doing, not my expectations. When the market drops under the lower band in a trading range environment it is usually a good idea to take profits on most shorts, because the normal thing for the market to do is snap back inside the band. One way to keep an eye on key levels like this is to set an alert, and have your broker text your cell phone when the market approaches bollinger bands or key support/resistance areas. When the text message beeps, then you can find some time to take a look at the market and decide what action is necessary.
New shorts carry some additional risk because the market is right on the lower band, formed a hammer pattern on Wednesday, and moved up on strong volume. The market shows horizontal resistance around 1775 and bollinger band support around 1740, so I will hold off on all but very strong volume triggers for a day or so until the market shows some conviction. Longs are interesting again on a move above the 1790 area on volume. Shorts are interesting if the market moves away from the lower band and then drops, or drops from here on increasing and above average volume.
Successful traders adapt to the market and do not try and force trades. I was focused on just trading a few small size positions because the market had been in a narrow trading range. If the break below horizontal support is real then the market will continue down on strong volume, or it will move sideways a bit to get away from the band and then continue down. In either case I need to see volume above above what we had last week and the first two days of this week to indicate that a move has legs, and thus be interested in taking larger position sizes.
Once the market breaks above the 1890 horizontal resistance area, or below the 1660 horizontal support area, it will have more room to run to the next support/resistance area, so I will look at moderate position sizes rather than just small ones. Trading ranges typically generate just a few triggers, and the ones that are generated do not run far. When the market is in a trading range I compensate for the increased risks by using smaller position sizes and quicker exits. When the market moves out of this congestion area, either up or down, we should see more triggers and stocks will have more room to run.
There are no risk free trades. I want to manage risk by looking at each setup and asking, 'what is the lowest risk way to enter this trade?' I then want to compare that risk to what my other choices are. I am not focused on one stock, I am looking to manage units of risk by looking at all available trades, the various entry techniques, and the potential risk to reward that each trade yields. I then take the best of what is available, within the constraints of the trading plan. I do not focus on watching for triggers to within the penny. I am looking at all the potential trades and then picking the ones that are best. All trading involves risk, there are no sure bets.
NASDAQ Daily Chart
Long Trade Opportunities:
Focus on Long setup's that hit the price trigger when the market is bouncing off support, breaking above resistance, or in a clear up trend. See information on Market conditions above to determine if longs are appropriate. Do not take positions just because they reach the price target, check volume and market conditions to determine if taking a position is appropriate. An Initial protective stop loss is typically placed just below the low of the pattern. If the set up does not trigger the next day, watch the pattern for a few more days. The newsletter selections are not to be considered a recommendation to buy or sell any stock, it is educational material only. Each trader must do their own analysis and be responsible for their own decisions. For more information on adapting trading techniques to market conditions see chapter eight of 'Money-Making Candlestick Patterns'.
Interesting Long set ups include:
AM on a move above 12.16. Accumulation.
SNX on a move above 27.51. Pullback.
SVNT on a move above 13.41. Pullback.
OMI on a move above 44.21. Accumulation.
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Shorting Opportunities:
Focus on Short setup's that hit the price trigger when the market is retracing from resistance, breaking below support, or in a down trend. See information on Market conditions above to determine if shorts are appropriate. Do not take positions just because they reach the price target, check volume and market conditions to determine if taking a position is appropriate. An Initial protective stop loss is typically placed just above the high of the pattern. If the set up does not trigger the next day, continue to watch the pattern for a few days. The newsletter selections are not to be considered a recommendation to buy or sell any stock, it is educational material only. Each trader must do their own analysis and be responsible for their own decisions. Interesting
Short set ups include:
BGG on a move below 13.13. Base.
CBT on a move below 12.09. Retrace.
EZPW on a move below 9.93. Base.
SU on a move below 25.34. Distribution.
Trader Tips:
When trading I want to be positioned to profit if a stock, or the market, does the usual thing in a given situation. When the stock does not take the usual path I may lose a little, but since by definition stocks do the usual thing most of the time, that is the way to bet. Since downtrending stocks usually bounce from support, I am better off to take my profits before the stock reacts to a support level by bouncing which would reduce profits on short positions. If I have a long position and the stock is moving up toward resistance, then I want to take profits before the resistance area in case the stock follows the normal pattern and retraces from resistance which would then decrease my profits.
Some traders are reluctant to take profits when a short position approaches support because they do not want to ‘be wrong’ and worry that they will ‘miss out’ if the stock keeps going down instead of bouncing. They are trading on emotion and ego, not logic. If the stock is most likely to bounce at support then most of the time you are better off to close the short position before it gets to support. There is no way to know what will happen on any particular trade. There are not magic indicators or super systems that will tell you the outcome on a specific trade. You are not smart if the trade worked and dumb if the trade failed. Traders focus on managing risk and being positioned to profit if the normal thing happens. When something unusual happens they may lose money, but it is by definition better to bet on the normal thing happening rather than the unusual. If the normal thing for declining stocks to do is bounce at support then I want to take advantage of this knowledge and use it to prioritize trades based on risk/reward, and also to take profits when a short position approaches support.
To subscribe to the Timely Trades Letter click here: Traders interested in learning specific trading systems, how to read the market, and techniques for improving trading skills may be interested in the weekly PowerTraderTools web seminars. Attendees will learn about specific systems for trading pullbacks, accumulation, distribution, bases, flags, indicators such as Stochastic and MACD, and Bollinger Band techniques. The idea is to show traders specific trading techniques, how they work, and the testing and research that makes them interesting. No amount of research or backtesting leads to a perfect system, or guarantees. However, I personally would rather be using trading techniques that have been shown to be interesting in the past, than ones that have never been tested or evaluated. Traders will be able to pick up ideas to add to their trading tool box. For more information visit http://powertradertools.com/Products.html.
Additional Information:
Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money. Steve is the author of, “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. This best selling book is available through www.daisydogger.com. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs. To receive a sample of the ‘Timely Trades Letter’ send an email to sample@daisydogger.com. Steve’s website: www.daisydogger.com provides additional trading information and market adaptive trading techniques.
Money-Making Candlestick Patterns: Backtested for Proven Results.
I wrote this book because I found that many candlestick patterns were poorly defined and there was no information on how well they worked and what market conditions were best for using the different patterns. I also wanted to know how results varied with additional filters such as volume and length of the shadows. I wanted to know what worked and what to avoid, so I backtested a half dozen different candlestick patterns in various market conditions and also tested them using different price and volume filters. This book not only shows how to use popular candlestick patterns, it outlines how to develop and test trading patterns. This book is available at the bottom of the page on www.daisydogger.com. Or by clicking here.
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