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Thursday, May 05, 2005
Market Recap
There was no follow through today on yesterday's big rally. I mentioned last night that the Dow and NASDAQ were at a level where big resistance can be expected. This coupled with the fact that the employment numbers are due out tomorrow before the bell, had traders taking a little profit off the table. After four up days in a row, the Dow pulled back a little today, losing -44 points. The S&P dropped -3 points and the NASDAQ traded flat. Tomorrow the employment numbers come out, and this number will no doubt sway investor sentiment. Expect the market to move based on this number good or bad. Tomorrow is also Friday and the markets have had a nice run-up this week so profit takers may want to be out before the weekend. I have not added any new stocks tonight. We will need to wait and see how the markets react to the employment number before entering any new positions.
A Little on Day Trading
I have been asked to explain a little about day trading. Although this is not a day trading service, I do day trade for a living and everyone is well aware of it. I do not send day trade alerts for obvious reasons but I do try to help our members become better day traders should they want to explore this type of trading. Tonight I will touch on some key points to help our day traders. I use what I call the “30 Minute Breakout System” for my day trades.
The 30 Minute Breakout System
I have mentioned on many occasions that I will try not to trade in the first 30 minutes after the market opens. This is the most volatile time of the day and stocks swing wildly during this time especially in the first 5 or 10 minutes. If you place a market order at the open, the chances are very good that you will be filled at the high of the first 10 or 15 minutes. That is okay if you are planning to hold the trade for a longer period of time but if you are day or swing trading, you have just put yourself at a tremendous disadvantage. You have to hope that the stock makes a new high at some point in the day or it will be a losing trade that day or if you are swing trading, you are in the red going into your first evening holding the stock.
I like to wait 30 minutes to let all the amateurs get their market orders filled before I get involved. Here is how I trade the open. We are trading in the direction of the trend so if we are looking to take a long position then we should know that the stock we are looking at is trending up. So my play will be to enter the stock after the opening volatility is over. In the first 30 minutes, the stock will have an order imbalance and will swing back and forth establishing a range (high and low of the day so far). That range will determine my entry price if I chose to make a trade.
Once the range is established, I would place a buy stop order at just above the high of the day. I did this today with BLUD and posted a day trade (DT) post to the message board shortly after the first 30 minutes of trading. Sometimes the 30 minute rule misses by a few minutes, no system is perfect. Although BLUD was a winning trade for me today, my entry was late because the breakout occurred after 20 minutes. That happens sometimes but the 30 minute rule works well and gives a true picture of the range. I want to be in the stock on the side of momentum if the stock should break out of this range on the first 30 minute bar. I would do the same when shorting a stock only I would place a sell stop at just below the low of the day for a stock that was in a down trend.
Say we have just taken a long position in a stock that just broke out to the upside and has made a new high for the day. I would then set my sell stop order just below the low of the first 30 minutes. This way I am protected in case this breakout fails. On the other hand, if it breaks lower than the first 30 minute bar, the chances are good that that stock will be down during the day enough for you to make a profitable short trade.
Keep in mind that these trades work best when trading in the direction of the trend, in other words, if a stock is trending up I want to be long the stock so I would not short a stock just because it broke to the downside and made a new low after the first 30 minutes. This is simply a trade that I would pass on. I wouldn't be long or short this stock but I would look at the daily chart to see where the next support level is. By doing this, I may be able to pick this stock up for a swing trade on a pullback to support. Remember, strong stocks pullback and that is when we want to enter them for a swing position. The 30 minute breakout system is for day trades only so I would not be buying a stock that made a new low for the day for a day trade, this would be a swing trade entry only.
You can use 45 minutes or 60 minutes if you prefer. I use 30 minutes but I have waited until 60 minutes passes before entering the trade. What I am looking for at that point would be if the stock is still above the high of the first 30 minutes. If it is, then it is a buy and I will try to get a slight pullback as long as the pullback is no lower the 30 minute high.
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Earnings Calendar
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.earnings.com |
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