Stockscores.com Perspectives
For the week ending May 29, 2004
In this week's issue:
Do you ever feel that doing the exact opposite of what you do would make you a lot more successful as a trader? Particularly in a sideways market like we are having now, many traders may feel that they should sell when they think they should buy, and buy when the think they should sell. However, while their results in the market would seem to support this reversal of trade entries, the actual position type is probably not the problem.
Because a market lacking conviction (like the one we find ourselves in now) is frustrating, traders will tend to make important mistakes. When they are in a losing position, they will tend to hang on in hopes that the position will turn around. When in a winning position, they will tend to exit the position and take profits at the first sign of weakness because they fear giving their profits back.
As a result, many traders are limiting upside, but not downside. This is a critical mistake in any market, but particularly in a market like we find ourselves in now.
Since trading is a probability game, we have to limit losses when we are wrong, but maximize gains when we are right. The gains have to pay for the losses, plus provide a return for our money and effort.
However, what we do instead is sell our winners early (it feels good) and hold on to our loses too long (taking losses feels bad). The simple pursuit of pleasure and the avoidance of pain is the source of our trading woes, and not the trading strategies.
To combat a market that does not yield many great opportunities, we have to do the following:
- Be patient for good picks. In a bad market, fewer good opportunities appear, so we should be trading less.
- When we enter a trade, use a stop loss order to limit downside. If the trade is successful, let the profit run until a strong exit signal appears. Do not limit upside by setting an exit order ahead of the trend. Sell on a stop order.
- Don't work harder. In a tough market, it is important to wait for obviously good trades, and not gamble on trades that are marginal. You can get away with entering marginal trades in a good market, but you can not in a market that lacks conviction.
So much of trading is a mind game, yet we think that it is all about the decision to enter the trade. If you have a sound strategy, then it is a matter of following the strategy properly and focusing on what you do after you enter the trade. Do not limit profit potential, set a stop to limit loss potential.Back To Top
When I am looking for a position trade (a trade that has an expected hold period of less than 3 months), the first thing I do is check the market indexes. They can tell me what strategy I should be applying, since I should not go against the trend of the overall market.
The Nasdaq market (symbol QQQ) has a Sentiment Stockscore of 48, and is falling in the long term (the green line on the Stockscores chart) and is rising in the very short term. Because the Sentiment Stockscore is below 60 and in a long term down trend, the market is Pessimistic. The recent rise in the Sentiment Stockscore is encouraging, but until the down trend is broken, it is a good idea to favor selling stocks on the Nasdaq market.
With that in mind, I applied the Long Term Breakdown Market Scan on Stockscores, which seeks out stocks that are breaking long term support levels and may be good short selling candidates. Applying this Market Scan to just the Nasdaq market reveals 8 candidates. I checked the charts of those 8, and found NOVL an interesting short sell candidate.
The stock has been in a long term up trend but in the past few months has begun to roll over. The falling tops on the chart indicate that sellers are beginning to take control of this stock, and the recent gap downward shows some fear starting to come in to the market on NOVL. With the relatively low volatility in price that the market has shown this past week, it appears that NOVL is likely to break in to a trend soon. Since there is strong pessimism in to the low volatility (the falling tops indicate this, as does the falling Sentiment Stockscore), I think that this stock has a better potential to break lower. A stop at $10 would be a good idea on a trade like this, to minimize losses if the trade idea turns out to be a bad one.Back To Top
1. QQQ
The Nasdaq market is generally pessimistic, despite an attempt at a rally this past week. The Sentiment Stockscore on this chart shows a general downtrend in the Stockscore, and it remains below the critical 60 point.
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2. NOVL
The longer term chart of NOVL shows a break of the uptrend, falling tops over the past few months and a test of important support levels. The recent downward gap on volume indicates that investors are concerned about the fundamentals of the company, and more selling pressure could develop.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
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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