Kaboom.. Errr. More more kerplat. It happens folks. The market gives and takes. Personally, I don’t care which way the market goes (of course I do in the macro, but as a very short term trader, I’m not overly concerned). Thursday was a sell-off and Friday showed obvious continuation with a boost in stop loss takeouts and nervousness. Are we in a market reversal or a healthy sell-off in an overall up trend? I have the answer (currently peering into my magic ball)…the answer is, HELL IF I KNOW.
Scanning the news this morning you see all kinds of scary headlines like “flirting with a correction”, “Obama vs Wall St”, “where will the next crisis hit”, etc. etc. If you read for long enough, you will probably convince yourself that the market and the economy is about to crash and flush down the toilet (note: consumer spending over the last 3 days is at the lowest levels we’ve seen as far back as my charts show..3 years). It could continue to flush, but trading with that fear hanging over you can really mess with your mind and ultimately become the demise of your trading profitability. You’ve heard it before, but it doesn’t hurt to say it again – Stop being emotional. The market destroys the emotional trader.
So, don’t be freaked out about Friday – trade your setups, stick to your rules, set your stops, etc. Think of it as just lines on a chart. You can play the market either direction and it doesn’t hurt to wait until the setups fit your style. Don’t force a trade. If you’re investing for the longer term, then you care about the fundamentals and less about the technicals – so, Thursday and Friday likely didn’t upset you too much, right? As a matter of fact, my boy Kunal took Friday as an opportunity to load up on some swing/long investment opportunities.
A few thoughts headed into next week (remember, I’m wearing my very short term trading hat – I’m not talking investments here)…
The market is nervous, so I’ll stand on the sidelines Monday morning and likely not trade heavily until the afternoon (if I have time). I want to see if the sell-off continues or if we start seeing some support. Obviously, news changes everything. Obama, Bernanke, banks, China, earnings – all kinds of crap in the news right now. Way too much to follow. Time to focus like a laser on setups.. block out the noise… leave my emotions away from the trading account… and protect my cash.
Existing Home Sales numbers could set the tone Monday, followed by Consumer Confidence, New Home Sales, Durable Goods Orders, JOBLESS CLAIMS, and finally GDP and Consumer Sentiment on Friday. Needless to say, we’ll know a lot this week. If you’re a day trader or scalper, following stocks that move with these news events can pocket you some quick profits. It is all about your trading style and what works for you. Don’t let Cramer, CNBC, or anyone else tell you what and when to trade. You know your schedule, risk tolerance, etc – understand yourself/learn/improve. If you’re a technical trader, then why do you care what Cramer says? In the Boom Factory (bullson.ws active trading room), we’re talking short term trading opportunities all day – it is a great place to cut through all the noise and target a limited number of stocks. This collaboration allows you to easily determine if a stock currently trades within your comfort zone and offers an opportunity to capitalize.
If I’m too busy to trade throughout the day, I look for different types of setups than I would if I was actively trading… more swing style vs scalp. I’ll set strict buy rules and always set stops. The stocks must have one of these three characteristics – significant support, significantly oversold, or breakout volume. I’ll set automatic buys based on these ideas and then immediately followup with strict automatic stops (often trailing). Then I can walk away and do whatever else I need to do for the day. As a technical trader, I don’t fall in love with stocks. I let the swing rules play the game.
If I’m actively trading (scalps and day trades), it is a different story. I may look for similar setups, but I increase risk and do a lot more scaling in and out of positions intraday.
OK – back to this week…
Since I’ll likely be very busy with my day job Monday, I’m going to focus my attention on one area – support levels (this could change depending on my schedule). Of course, everyone is talking about support levels in the overall market, but I’m talking about sector and individual stock support levels… back to laser focus.
On Friday, 9 of the 16 companies that hit 52 week lows were in the Financial sector. Ok. time to load up a watch list of oversold financial stocks near or at support. When/if we get a bounce, I’ll pull this list out and look for volume strength reversals. I’ll also filter this list to only include financial stocks that are actively traded (over 400k shares, generally, for small cap).
Check out this site and run some screens yourself – I use it over the weekend when I’m looking to group setups together, etc. http://finviz.com/screener.ashx.
My point is this – when there is a lot of anxiety in the market, you gotta focus on what works for you – make your watch lists, stick closer to your trades, set stops, and leave your emotions out of it. You could buy a stock at 10am and sell at 10:30am for a small loss because your stop was taken out. That’s ok. On to the next trade. Don’t take your failed play to bed with you and have to pray that it doesn’t gap down in the morning. This is supposed to be fun, remember?
There are many ways to trade and invest. Some see these pullbacks as great buying opportunities – this is true if you know why you’re buying the pullback – good fundamentals? Pulled back to significant support? Before you buy, know why.
That’s all for now. I’ll be back Sunday in the Premium blog with a few stocks I’m watching for Monday. Focus like a laser.