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Wednesday, January 12, 2005
Market Recap
The markets broke the losing streak today with a convincing rally. The markets started the day up on some good Intel news from last night but quickly faded fast and spent the morning drifting lower until the sellers finally dried up. Buyers started to show up to bargain hunt as predicted, and the bounce we expected to happen soon, happened this afternoon. The indices finished strong with the Dow gaining +61 points and closing near its high of the day. The NASDAQ gained +12 points and also closed near its high. The S&P closed at its high with a +5 point gain. Today's reversal could be the start of another uptrend; many stocks bounced near their 50 SMA lines as this reversal was taking place. Charts are still somewhat damaged, but this action can repair charts quickly with follow though buying tomorrow. That will be the key, will there be follow through to this rally? If so, we could be back in business. I had expected this rally to happen and that is why we recommended not shorting any stocks in these oversold market conditions. We joined the buying frenzy today by taking a few positions. Our stops are in place because, until we are sure this rally is a true reversal rally, we must be cautious.
Green Apples Are Better Than Red Ones
AAPL posted earnings after the bell today, and as expected, they were super. Like INTC yesterday, AAPL also posted record revenue. AAPL sold over 4.5 million Ipods last quarter. You may recall we predicted the Ipod would be one of the hottest products under the Christmas tree. By the looks of these numbers, we were right. AAPL was up big in after hours trading and should gap up tomorrow. Hopefully, with great numbers from INTC and AAPL kicking off the technology earnings season, the NASDAQ can pick up some steam and forge ahead. We need this index to get back above its 50 SMA in order to resume the bull mode. If these two tech bellwethers with record revenues cannot get the NASDAQ going, then I am not sure what will. I think the AAPL numbers tonight will give the NASDAQ a jump start in the morning. Hopefully, the buying will have some staying power this time and add to the gains we had today.
The Bounce Play
It has become a market where catching bounces has been the only game in town for the first couple of weeks in January so I thought I would talk a little tonight about the strategy of playing stocks for a bounce. Stocks that are pulling back from a very good run can be very nice gainers after the profit taking subsides. These are great plays in a market that is uncertain because the stocks still have price support, moving average support, trend line support, and the general trend is still up on the chart.
After a stock makes a nice run, some impatient investors lock in profits and sell. This selling usually occurs on lower volume than when the stock was rising. This is a clear signal the stock will rise again. Once I spot this minor selling on low volume, I look for a good area of support and place a limit order at that price. If it fills, I immediately place a stop just below the LOD. With an entry at support and my stop in place, I have a minimal risk trade with a very good chance of a nice bounce for a nice gain.
Remember, volume in the pullback is key. If the volume on the pullback is higher than the volume was when the stock was rising, I want no part of the pullback at all. Stocks will bounce when they are declining on low to average volume. If the volume is above average, there is a much greater chance that the downward pressure will break through the support level and take the stock even lower. Volume is imperative when we look for bounce plays. If trading bounce plays, please use a protective stop just below the level of support. If the stock does not bounce and falls through support, your protective stop will prevent you from taking a bigger loss.
Bounce plays can also work well with shorting stocks as they hit levels of resistance. Shorting into strength on low volume using limit orders is your best entry point. Set a protective stop just above resistance in case the stock breakouts on you.
Don't forget to check your short-term holdings and know when those companies are reporting earnings. Holding a stock through earnings is risky and I do not recommend it. You can always buy the stock back after the dust settles.
http://www.fulldisclosure.com/earning.asp?date=200...
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