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Tuesday, February 24, 2004
Good evening friends,
Market Recap
The market opened lower this morning and we had a brief but weak rally that ran out of gas quickly. Selling continued later in the day with a feeble attempt at another rally into the close. The market is acting just as we have been predicting these last few days. There is a boycott of the NASDAQ with buyers on strike. There is a lack of volume to speak of during the recovery attempts. Today's action caused the NASDAQ to dip below a prior low and this has not happened since March of 2003. This is a very bearish scenario and could start a pattern of lower lows and lower highs. In other words, a down trend could be starting.
Bulletin Stocks
Our list of stocks with good charts is shrinking at a rapid pace. We have very few good charts to choose from tonight, and this always happens when the market gets skittish. Charts are going to need time to set up again. The good news (if any) is that the NASDAQ remains over sold and I am expecting a sizable bounce in a day or two, most likely starting tomorrow. If the high of this bounce is lower than the prior high, then we should be shorting this next rally in my opinion. The NASDAQ just doesn't look strong and doesn't act like it wants to make new highs. I'm afraid we could be whipsawed back and forth for the next couple of months.
“Target Practice”
One of the perennial questions that I am asked is concerning price targets. Specifically, why don't we set a price target to sell at? The flip side to that coin is a protective stop. You will hear us talk about protective stops much more frequently on the downside than on the upside. A true market professional uses protective stops to also maximize their upside. You should not set a target price on a stock; it all comes down to the mentality of the trade. This is illustrated with these two examples:
Example 1:
You buy a stock at $4 and set a target at $6. The stock climbs to $5.80, and then drops back down to $4.25. You've just lost out on a huge gain because your target was not reached.
Example 2:
You buy a stock at $4 and set a target at $6. The stock hits $6 and you sell. You've made a nice profit. The next week, you're looking at the stock and notice it's at $8, Oh my, by setting a target, you just put a limit on your own gain, bad move.
Setting a target price is limiting your potential profit. You are setting yourself up for the emotional side of trading because, either you had something close and lost out or because you could have had so much more if you had just let it run. You'll wind up torturing yourself over the trade because of what could have been.
Use Stop Losses Wisely
The key to trading is in using stop losses wisely. We've already talked about gaps. When a gap down occurs, even the most accurately placed stop loss order can be filled at the market lower then your stop price. We can't control unexpected news releases; they are part of the game. Let's think about the upside rather than the downside. If you place progressive stop loss orders as a stock is climbing, you can maximize your upside potential and minimize your downside risk.
Another example: If you bought at $4 and the stock climbs to $6. Placing a stop loss at $5 or $5.50 would be wise. Then, when the stock climbs up to $6.50 or $7, we move our stop loss up to $6. When the stock moves to $8, we move our stop loss up to $7 or $7.50. Now, we're in position whether the stock goes to $10 or back down to $4 to profit. We haven't sold, so we're in there for the next leg up to $10 (should it run), and we have also locked in a guaranteed profit should the stock fall back. We have taken the emotion out of the trade.
Customize Your Stop Loss
The other key to any stop loss is that the trader must decide what is best for them. I don't set target prices because of exactly what I've just discussed. I also don't issue a downside stop loss on every stock because each individual trader must decide their risk tolerance. If a 5% downside is all you are willing to take, then that is where your stop loss should be placed immediately after your buy order is filled. I also don't set a stop loss on my orders because I am able to watch my stocks throughout the day.
"Day Only" Stop Loss
I do, however, set them as “Day Only” stop loss orders if I'm going to be away from my screens during the day. “Day Only” because we want to prevent them from filling at the open the next day since we know amateurs control the open and that is the most volatile part of the trading day. I strongly suggest that if you cannot watch your stocks during the day you should place stop loss orders and rely on them much more heavily than someone who trades for a living and is near their screens all day.
Just remember, when you are targeting a price you are likely to find that your aim is off either on the high side or the low side, this is because markets usually over shoot in either direction. We always try to aim high and using the right tools of the trade the right away will help you to achieve better results.
Some OTC bb stocks for your watch list are MYNG, GETC, and URMP
As always, thank-you for your support past, present and future! Have a great night everyone; we'll see you all Wednesday evening.
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