Tuesday, May 04, 2010

Intrinsic Movers

This market reminds me of the time the engine of our boat broke down on the way back from Murion islands.  We had a great day filled with fun and frolicking, but now we are stuck in the middle of the ocean off Ningaloo reef in Western Australia, waiting for help to arrive.  Similarly, 2009 was a fun filled year, you couldn’t pick a stock that didn’t move up.  But now we are stuck possibly a range or a down channel waiting for the big orders to come in and move us in the “right” direction again.  Have the opportunities dried up?  Are there no trades out there to be had for swing and longer holds?    Not really, the market always presents opportunities, you just need to go fishing while you wait to have a little sashimi.

In this type of environment, where there’s no clear wind direction to fill your sails, my style changes a bit.  I go to my “intrinsic movers”.  A favorite in any market really, but proves most useful, with a high probability of success, when many other stocks and indexes are bobbing in the waves.   The pattern that best serves these movers is the long-term down channel (and to a lesser degree the long-term triangle) breakout.  Not the little flags and pennants that everyone looks at after a big move already happened, those will likely fail in this environment, but the ones that took months in the making.  Whether you’re talking about a penny stock or a  hundred dollar stock or ETF this is one of your fishing tools regardless of the circumstances.

Once the down channel breaks its resistance and confirms by closing two days in a row outside of the channel you will see some big moves coming in any tape.  This is due to the nature of the pattern; you have the short-term channel players who shorted at the top of the channel, and the longer-term trend riders who shorted at much higher levels.  They will see the channel dissolving and will want to get out before anyone else does.  Therefore you get a violent initial move that you can ride blissfully with either a trailing stop of a manual/mental stop to get you out before the move is done.

There are many examples I’ve posted over time.  Take sugar ETF SSG for example.  I posted the chart of the breakout back in December when the channel broke to the upside.  A violent move from 65 to 85 in about a month ensued.

Another obvious one is the US Dollar UUP, after a long downtrend that started in March 2009, also broke the channel with such violence that you couldn’t miss the opportunity.  Crowded or not, those labels don’t negate the opportunity these down-channel-breaks present.   I posted this chart many times on
RMD, I posted the chart of this stock back in August with its long down trend, AZO December 9 CQP as well as many others .  All had a strong down trend that caused the price to catapult after the channel break.

This does not mean that we will have an uptrend after the break of the down trend, just a change of the current pattern.  If you are a fundy player who thinks the stock is undervalued, this is your signal to get in as well instead of “averaging down”.   There are other details that entail, but this is the crux of this trading style.
Many of the retail stocks are going through this right now including M and JCP as well as a few others I’ve tweeted about recently.  This is purely a technical play, more of a knee jerk reaction type of move really with a high probability of success.

Add this to your bag of tricks and have fun with it.  There’s always an opportunity in the markets no matter what direction we’re moving, the more patterns and tools you have the better prepared you will be for any market.

Peace and profits to all,

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