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Thursday, January 06, 2005
Market Recap
The markets took a much-needed rest today from the hard selling we had witnessed for the previous three days. A bounce on strong volume would have been the preferred action, but I will not complain at this point. There was a time in the day when it looked like there would be a nice sustained rally, but it soon fizzled. The Nasdaq closed weak again and finished the day down –1 point and near the LOD. The Dow and S&P fared a little better and did manage to close green and up off their lows. The Dow finished higher by +25 points and the S&P finished the day up +4 points. Oil was back in the news today as it spiked up over $2/barrel and moved back above the $45 level. Worries of OPEC production cuts and a potential oil-workers strike in Venezuela pushed up prices.
Let's get all of the bad news out of the way. The Nasdaq closed below its 50MA for the second day in a row. The Sox index closed at the LOD. The volume on the bounce in the Dow was below average. The volume on the down day for the Nasdaq was above average. The Nasdaq has yet to close positive in 2005. If that was not enough, the action the last four days has now left many charts with nice ugly bear flags on them, including the charts of the major indexes.
The bad news is out of the way, so let's look ahead and focus on the good news. We are 95% cash in our TWPD portfolio so we have been immune to most of the selling the last four days. All three major indexes and even the Sox index are sitting right at a trend line that we can expect a bounce off of. I have charts that show this. All of this adds up to my thinking that we will put some cash to work very soon. By soon I mean tomorrow.
Plan for Tomorrow
There are two possible scenarios that we have to consider for tomorrow. The employment number will be released before the bell so how the herd reacts to this news will determine our reaction. Remember, we will react to the reaction.
If the jobs number is good, it is almost a given that the futures will be up. If the futures are indeed up, the plan will be to buy stocks that have been beaten down the last few days as they move back up through prior support they have fallen below. As with any move through resistance the volume must be strong or pass on the buy.
If the jobs number disappoints, the futures will more than likely be down. If we do open lower, we will then look to buy stocks that fall to moving average, trend line or price support. This is the same strategy as the other day when we bought weakness in anticipation of a bounce. Of course, check the volume and pass on any stocks that the volume is strong. Stocks with strong down volume we can buy as they move back up through the support they breach.
My plan in the morning is to send a pre-market alert after the jobs number is released outlining the stocks and buy points that I plan to have in place. The stocks will all be bulletin stocks unless I find something in the morning. You will know ahead of time all the stocks I plan to buy and at what price so the buy alerts should come as no surprise. I will send out the alerts as fast as I can.
I had mentioned in the bad news that many stocks have big ugly bear flags on them. Please keep this in mind when buying these positions with me because there is a very good chance that we could get stopped out of many of them for small losses. If everything goes as planned, I would like to set stops just above our entries (assuming they move higher) to ensure that our risk is small to nil in case the market decides to sell off further. I have no problem getting out of the way of the market and holding on to my cash.
While there is certainly some risk buying stocks based on how most of the charts are looking, I think we can limit that risk if we have a plan and we stick to it. We could very easily sit back with our cash and wait until the indexes resume their uptrend and the charts shape up. There is nothing wrong with that. It is my feeling though that the reward is worth the risk of playing some stocks at support when the indexes are over sold and at support. The key to our success will be trading the plan and sticking with tight stops.
My gut feeling is that the jobs number will disappoint and the herd will be selling at the open. My guess is that if the open is weak we will be buying many more stocks than if the open is strong simply because it will be easier to buy stocks with limit orders at support than trying to buy stocks moving up through resistance. In either case, I think we end the day higher on all the major indexes tomorrow. Of course we never get what we expect so I will not be surprised the least if my prediction is incorrect. Whatever happens we will live to trade another day.
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