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Wednesday, February 09, 2005
Market Recap
A lot of news hit the wires today and last night after the market closed. The news was not taken well by the markets, and it showed today with the Dow losing -60 points, the NASDAQ dropping -34 points, and the S&P dropping by -10 points. After the bell yesterday, CSCO came out with earnings and the street was disappointed in their forward guidance. Coupled with a sharp drop in oil inventories, this brought in the sellers today. People are selling at a least bit of bad news; this small amount of bad news seems to be over shadowing all the great earnings reports that have been released lately.
The 9 day Exponential Moving Average (EMA)
Once in a while, I will disclose some of my best trading secrets. Tonight is one of those nights. If you look at most of the charts for the bulletin stocks you will notice they all have a few things in common. Most importantly, they are all in up trends. Those are the only stocks we buy; we do not buy stocks in down trends. The stocks we have on our list are pulling back with the broad market (that is no surprise) but what I want to point out is that these strong stocks are pulling back on low volume. The other thing most have in common, at least in tonight's charts, is that they are also pulling back to a common place on their respective charts, the 9 EMA. If you look at the comments on the bulletin stocks tonight, you will notice this common theme. This is not a coincidence; this is an area where most strong stocks find support. The 9EMA is an area where bounces are likely to occur, especially when the pullbacks down to these averages are on low volume. Together with the NASDAQ closing today right near a strong support level of 2050 and one could make a case for a bounce soon.
Strong Stocks in a Dull Market
You would think that a big market down day like we had today would ruin a good many charts with a number of them being removed from the bulletin. However, much to my surprise, there are no charts with enough damage to warrant removal from our list tonight. All charts remain intact - some look better than others but none are bad enough to remove. This is a great sign; it means the strong stocks are holding up. With the NASDAQ near support, if it can bounce, I suspect these strong stocks will continue their upward trend.
Bullish or Bearish?
January was dismal this year for the market, and so far in February, we have seen a little snap back rally that up until today was looking good. Caution still prevails. At this point, we do not know if this is just a dip in a continued bull phase or the beginning of a resumption of the bearish phase we were in before this snap back rally. The longer term trend remains up. However, short term caution is advised.
Our Approach
Our approach to the 2004 sideways/flat market was to squeak out gains of 10% or more with tight stops to minimize losses. We have carried that approach into 2005 until we can get a handle on what this market wants to do. In a full fledge bull market, the correct position is 100% long with possible margin use as well. It is a buy and hold situation, picking only the strongest stocks in the market and letting them run-up, far out pacing the broad market returns. Stop loss orders are placed with much more room for the stock to work without taking yourself out of the trade. This allows room for the stock to pullback and keep you in the trade while the stock is in its up trend.
In flat markets, we are caught between the bull and the bear. We do not know on any given day what the market or stocks will do. For this reason, our stops have to be tight. There is no flexibility at all. Trades are much harder in flat markets; we trade with less confidence than we would in a bull market. Because of this, we tend to stop out much quicker to preserve our capital. Whether you agree with the tight stops or not, there can be no argument that they do save the day on a day like today in the market.
Educational aspect of TWPD
We are probably over trading, and I will admit it. But with commissions so low these days, you can make darn good money if you are getting 10% gains on each trade which is our goal in a flat market. We may soon change our focus to only the best of the best chart set ups. This will result in less trading but bigger gains in the stocks that we do trade. I get email from both sides, some say we trade too much. When we do not trade, I get email asking for more trades. Remember, you do not have to trade every stock with TWPD. This is a market where we should be cautious and if you are a less aggressive trader, my advice would be to slow down and not try to follow every trade. For the more aggressive, active traders (that is traders who trade full time) who likes a faster pace, we try to accommodate that as well. Hopefully we will be able to find a happy medium. We would like to please everyone, but that is not possible. The market will dictate to us how we trade and we can not help what the market does. We cannot control the market, but we can control our trades. What we are doing beyond just the trading, is focusing on the educational part of the service and trying to help our members become the best trader they can be. A great example of that tonight is our focus on the 9 EMA. If you have never made a single trade, tonight's discussion of the 9 EMA is worth a year's subscription price alone. Follow this indicator; your results will improve drastically.
Note. Due technical problems at Stockcharts.com, we are unable to bring you any charts tonight.
Please tell a friend about our service. As always, thank you for your support past, present and future! We'll see you Tomorrow evening.
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.
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Stock charts listing
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