Adapt Your Selling Approach to the Market Action
Stockscores.com Perspectives for the week ending June 20, 2009
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In this week's issue:
How can we balance the need to maximize profits but not give back those profits when the trend reverses? The key is in recognizing emotion in the market and taking a more aggressive approach to selling when emotion is high. Doing so is quite simple; it is all about the slope of the upward trend.
Up trends tend to start slowly, it takes time for investors to believe in the company story and take action. First a breakout of some sort occurs and then usually a pull back as investors show doubt about the validity of the price increase. New investors are attracted by up ticks in the stock and significant fundamental change is often what causes breakouts so the buyers tend to take control of the market after the initial pull back. This takes the stock in to an upward trend.
Upward moves and pullbacks create the upward trend line, drawn along the bottoms of each successive pullback. With these rising bottoms the market establishes the optimistic upward trend chart pattern.
An orderly and relatively unemotional upward trend will be linear. This means that each successive pullback back to the upward trend line can be defined by a straight and upward sloping line. New high, pull back to a low that is higher than the previous and repeat. So goes the upward trend.
The emotion of investors heightens as the trend matures. With higher prices come entry decisions motivated by greed rather than rational analysis. Investors start to take positions because they fear they are missing out on an opportunity if they don't buy. The pace of the upward trend steepens, changing the linear trend in to a parabolic curve.
In an orderly upward trend we look for a break of the upward trend line as a signal to exit the trade. When the trend goes in to a steepening curve we have to get more aggressive to lock in profits. Since emotion is playing a role in the buying decision of investors it is likely that the stock will suffer a sharp correction back to the trend line.
As a result, the Stockscores Approach advises that the trader look for a close of the current candle below the low of a candle that was noticeably taller than those before it. We call these Trigger Candles because they trigger an exit order and use them when the trend is steep and motivated by exuberant buyers. If the stock has really run away from the trend line we can also go to the 15 minute intraday chart and look for a trend line break on this shorter time frame.
This approach allows us to maintain a position during the inevitable pull backs that define a long term upward trend but still take advantage of abnormal profits that come from irrational market behavior. We take the less aggressive approach to selling by looking for a break of the upward trend line when the trend is linear and move to the Trigger Candle on intraday trend line method when the trend goes parabolic. This often allows us to maximize profits and even re-enter the stock when it comes back to the longer term linear trend line.
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As we sit on the edge of summer the market appears ready to shut it down as traders take their profits from a great rally off of the March lows. I was able to nearly double one of my trading accounts during that time period and am now ready to play some defence as trading volumes dry up. This is a typical market response at this time of year, it actually usually happens earlier than the closing weeks of June.
However, the market indexes have not actually broken their upward trend lines yet so it may be unfair to give up on the buyers. For those who feel the need to trade I suggest playing the pull back play strategy. This swing trading strategy looks for stocks that have been in strong linear upward trends and have suffered a pull back on profit taking. We look to buy these stocks when they show signs of stabilizing around the long term upward trend line.
The S&P 500 Index has made a pull back to its upward trend line and should bounce higher next week. However, I am concerned by the slow down in trading volumes over the past few weeks. It is this that makes me think that there will not be much of a bounce from here, that we may at best go in to sideways trading range.
This strategy was best played on Thursday but there are still some opportunities to play a bounce back if it does materialize next week. Here are some that I found with the Pull Back Play strategy.
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1. T.WTN
T.WTN was a nice winner but it got ahead of itself so I sold mine around $2.25 a week ago. This week the stock has pulled back but now appears to be stabilizing and ready to try to move back through its highs. Support at $1.75.
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2. FCS
The chart of FCS shows how this strategy works. The stock runs up and away from the trend line and then pulls back to it and bounces. It looks to be starting the cycle again as it made a green candle at the trend line on Wednesday and then again on Friday. Support at $7.19.
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3. CZZ
CZZ did a four day pull back from its highs and then closed up and above its open on Friday at the upward trend line. Support at $5.28.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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