Lasertrader's Place

A Potpourri Of Trade Ideas and Setups

Initial Thoughts To Another Trader (Part 2) – Stops

Posted by lasertrader on August 14, 2011

I had several requests to continue to share the email exchanges I am having with another young trader. Tonight I was asked asked to share some thoughts on stops. This post is being written at a time of extreme volatility on the market. Here is what I wrote..I hope it provides some food for thought.

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Hello My Friend:

The most important thing you just said is that you are not in a hurry to trade this market. Thats the right attitude. The volatility is nuts and the probabilities are against you. There is no good trade at the moment. I read a lot of twitter just to get a feel for what the masses are thinking. I am bothered that so many are looking for a continued bounce up to the breakdown point. The market is designed to hurt the most and although the technical thing to do is to test that breakdown point I am not convinced it will be that easy. There are bear flags everywhere. Bottom line, step aside and be very careful.

For fun I would like you to read a blog post. The twitter stream is full of young guns with great tactics but sometimes the old guys who have been around a long time can provide some food for thought. Peter Brandt is one of those guys  http://peterlbrandt.com/smorgasbord/

Ahhh stops, now thats a topic that you can talk about forever because there are so many ways to do stops. For now i suggest you take a conservative approach to looking at this topic. The best way to do this is to work on proper position sizing. Before you put your position on you need to make sure it is sized properly. From that exercise you can determine the stop. Remember, all that matters is your account balance so you need to manage your risk by figuring out how much of your portfolio balance you are going to risk on a particular trade. This market is in the red zone as far as risk so I wont try to talk about these conditions, but given a more normal market you may decide that you are willing to risk .5% up to 2% of your portfolio on a given trade. >5% and 1% are usually good numbers to use and when the market is trending strongly you could even go up to 2% (for the 2% there is more to consider which I will talk about in a bit).

I am goig to make this simple and as you start working on it you may adjust it to better fit your style and tolerance. Ideally, you are buying a stock when it has started a move up. You can immediately set a stop at one of two places. The first and more agressive would be at the day’s low. The second and more relaxed would be the previous days low.

So…when you put on a trade you need to figure out how many shares to buy so that if you are stopped out you will only lose the .5% or 1% that you had planned. These percentages are for the momentum stock trading style that I trade. Its funny becaue you will often see people quoting stop out at 5% or 6%, well if you put your whole portfolio into that position and you lose 5% you will be hard pressed to recover quickly.

Now lets talk about the 2% risk in a more trending market. The reason you would risk up to 2% is that you want to maximize your gains in a strong trend. Remeber the risk drives your position size so a larger position will pay off better in a strong market. In a 1-2% risk market your swings would and should end up being more than 2 to 3 days, they could be weeks if you are lucky.  With this in mind I would only put half the position size on with the first buy and perhaps add more the next day as it shows it will continue strongly.

Now, once you are in a position you need to figure out where your stop should be. It could be the previous days low, the 2 day low, break even, or at a support level. I wish I could be more specific but it really depends on the stock and the chart. There is also a whole discussion on Average True Range (ATR) for the stock you are trading and using a 1.5 or 2 ATR as a stop.

I think you were more concerned about the stop on the initial position and I think I have given you some guidelines to think about. Once you are in a profitable position it will really depend on the action, how many positions you have on etc. Just keep in mind my two main points. Your goal is to increase your account and there is always another setup. I often sell too early but I wont look back because I have more opportunities than I can usually handle. Lately am trying to work on holding longer and have that as my main effort for the forseeable future.

You also asked about some of the mechanics of stops. You should use a stop/market order. Yes, there is always going to be slippage and you may end up selling quite a bit further below your stop but if you use a stop/limit the odds are you will not get exercised because price will keep going down and not come back up to your limit. You realize that a stop limit says trigger at the limit price first, then execute at that limit price or above. Usually the stop gets triggered at the limit price and the next trade and all that follow are below and you never get executed.

One of the nice parts of  Thinkorswim charts is that your standing orders are shown on the charts. If you are watching your positions you will pretty much be able to judge in advance the action and pull your position manually even before your stop if it looks like death on the doorstep.

Here is another thing to watch out for. When I swing trade I never have my stops enabled at the open. Quite often I would not enable them until 5 or 10 minutes later. The first reason is that there are often some unusual spikes at the open that will take you out and then the stock pops right back up. Second, if there is a gap down there is usually a bounce within the first 30 minutes or even first 10 minutes back up to where you would have stopped out or even back to green. Be careful to avoid the opening nonsense and dont panic with the masses.

This should get you thinking. We can further this conversation as you would like. Just ask.

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Why Is It Important To Watch The Futures When Trading Index ETF’s (and stocks)

Posted by lasertrader on August 10, 2011

I hope everyone is surviving the most volatile week I can remember over the years. I see many traders trading index ETF’s to take advantage of the extreme volatility in the markets intraday. On the Stocktwits stream I often see mention of the Futures but I dont see many discussions about how watching the Futures instead of the indexes can help you make better trades in the Index ETF’s. Many folks trade the SPY off an intraday chart such as the 5 minute chart and look at support and resistance over multiple days to determine entry and exit points. You can be very successful doing this but if you want to have a better edge you should be watching the S&P 500 Futures in addition because there is information that the Futures provide that you will not see on an S&P 500 Index chart or a SPY chart that will help you from getting blindsided by reversals that seem to come out of nowhere.

Why watch the Futures? You watch them because unlike the SPY and S&P Index charts, the futures trade 24 hours with the exception of a 15 minute period from 4:15 PM ET to 4:30 PM ET. The overnight session which runs from 4:30 PM ET until 9:30 AM ET the next day is traded entirely on an electronic exchanged referred to as Globex. During the day session from 9:30 AM ET until 4:15 PM ET the Futures are trade both on the electronic exchange as well as the big contracts traded in the Futures Pits. When the Big Contract is trading the electronic exchange mirrors those Pit Traders tick for tick.

The edge come in paying attention to what happens to the Futures during the overnight “Globex” session. If you watch them on a 5 min chart you can identify areas of support and resistance that occur only during the overnight session. Quite often, overnight levels can be defined by events and market actions in other parts of the world while we sleep. The key is to realize that those overnight support and resistance levels come into play during the regular trading session. You may be in a SPY long looking at a multiday SPY 5 minute chart thinking I have 50 cents more to go before I hit resistance but then all of a sudden the SPY stops moving up and reverses out of nowhere. If you had a Futures chart with the overnight session visible you willl often find that the place the SPY reversed just happened to be a resistance level only seen in the overnight session.

Below is an example from 2 days ago. The grey shaded areas are the Globex overnight Futures session and the black areas are the regular market hours session. Notice how during the regular market hours after a drop at the open the Futures rallied up to hit a high at the green line and visited that level twice before pulling back? As you can see, that level corresponded to the overnight Futures high which served as resistance. Then, the Futures dropped rapidly and reversed dramatically right at a support level marked with the red line that could be easily seen in the overnight Futures chart. This is a powerful tool if you are trading the SPY. In many cases these support and resistance levels will not be seen in the intraday SPY charts and only in the overnight Futures charts


If you are trading the SPY pay attention to the ES Futures, the IWM corresponds to the TF Futures and the DIA corresponds to the YM Futures.

I also mark the following levels on my 5 minute Futures chart each day because they more often than not are levels of importance. Overnight Globex high, Overnight Globex low, the level at 4 PM ET from the previous day and the level at 4:15 Futures close of the previous day.

I hope this helps show why the Futures are important even if you aren’t directly trading them.

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Initial Thoughts To Another Trader

Posted by lasertrader on July 4, 2011

I often find myself meeting and discussing with new traders how to be successful at this business. This week I sent an email to a friend that I thought I would share. As I mention in the beginning there are many ways to be successful at this business so pick your own style. This email was a high level introduction to my methodologies.

 

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Hello My Friend,

I will just ramble a little until we get familiar with each other and find what works for you. There are many ways to make money at this game and the trick is to find the one that fits your personal comfort level and style. In my mind the simpler the method is the better.

I have tried and done every trading syle known I think over the years. The one thing I can say is that you will never be successful following anyone else. You must develop your own repeatable style and methodology and do it every day. The key is filtering out all the noise that comes at you like newsletters, CNBC, Twitter, Blogs, Sites etc. I can say that the things I learned that make money came from other professional traders that were trading every day, not writing newsletters and blogs making believe they are actually trading. Even some of the well known gurus I have found are really deceiving us making money off their writing and not trading. They are very good at spinning it like they really are making trades and real dollars.

I often help other traders that are having a hard time and find that they are just letting too many outside influences into their head and its messing them up. It usually takes a while to convince a trader to stop reading all the newsletters and twitter feeds they were reading every day all day. Once you stop trying to chase others ideas and turn it all off you will start making money. One good friend who was in a slump and lost his confidence. He turned off his twitter feed and focused on his own work and after 2 months is finally back with his confidence.  Hes a good trader who trades very much like I do. Another trader friend I have worked with took over 4 months to break the habit of outside influences and now that he has he is focused and making money from his personal business model.

OK, that was a long intro. Lets get to methods. Like I said I have tried everything. I traded the tape when you could actually see things on Level II, I chased news stories. I traded gap strategies etc etc. after many years I finally have a system that I do every day. I will admit I will trade the other styles now and then when the market is choppy but its only because i like to trade every day. Let me tell you what works for me from a high level.

I prefer to trade to the long side. I can short and used to short all the time but its stressful and unpredictable so I only do it when there is a very good setup and I dont have any longs. For instance today I shorted CREE at 33.45 and covered at 32,49. I trade technical chart patterns and all my patterns are based on the daily chart. I use very few “indicators” and can do my trades with just a chart of price bars and volume. There are a few other things I think are important that I will tell you about at a later time as we go through this.

If you look at the twitter stream it is full of guys posting chart setups that are technical patterns. For the most they are just looking through random lists of stocks lookiing for patterns. Not all patterns work as they are supposed to so if you just look through stock lists randomly you will find a lot of great setups that will fail. My edge is that I minimize my failure rate by making sure I am using the right list of stocks.

Since you have been doing this for a while I am sure you see that there are people looking for new highs or unusual volume or news stories to find their candidates to trade. Thats good but most of that is already priced in or you are too late. I use a specific list of stocks that I trade on a principle called PEAD = Post Earnings Announcement Drift. This is a list of stocks that beat their earnings estimates both revenue and earnings per share by a significant amount. These stocks usually pop initially but then continue to have an upwards bias for the next 3 months until the next earnings. Since earnings growth is the primary driver of stock price it only makes sense to focus on this as the “edge” in stock selection. All the other things like news or some volume or options activity is usually temporary. I minimize risk of pattern failure but choosing to trade stocks that have a reason to continue up.

In a trending market my trades are meant to be 1 to 3 days with 3 days being the planned on holding period. When a pattern breaks it usually is a 3 day move before the stock rests. If the market is good, the stock can continue for weeks but that only happens a couple of time windows during the year. By all means, when those time windows are in play, ride the stock for as long as you can. I usually have far more opportunities than I can handle and I have found my style to be best taking the 2 or 3 day move and going on to another setup.

There are a lot of ways to do the homework to find the stocks with earnings surprises and I used to spend a lot of time. Now I use a service that does all the work for me and I just download the list from the screener. The tools is called Bluefin and is available from The Patient Fisherman . Each night I go through the list and look for the proper setups. When I find them I set alerts in my charting package. Then, I just sit there during the trading day and wait for the alerts to go off. I look at the stock quickly to see if the volume supports the move and buy if I think the market will also support the move. The list of possible candidates is usually over 200 stocks and personally I dont look at those under $10 a share but I looked today and saw there were many even down at the $1 to $5 range. This means you will be able to use the low end of my list for your candidates if you want to try my methods.

I am going to stop here. We can next get into two other topics. One is the patterns and what to look for and the other is how to know the direction of the market winds. I am a firm believer that most stocks move with the market and I do a lot to trade when I have the wind at my back. For instance, I saw a lot of people buying the close today. My wind vane is flashing a warning signal here and I would not hold a long overnight. It may not happen tomorrow but we are due for a quick pullback in the next couple of days.

I just wanted to start getting you oriented and we will go at this slowly so you can develop your own repeatable style. Let me know if you have any questions. More to come.

 

LaserTrader

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What You Can Learn From Online Poker To Help You Trade Better

Posted by lasertrader on April 27, 2011

The other day I was chatting with a friend about how to modify his approach to trading and make more money. He is constantly trying this method and that method and mixing styles every day. As I rambled I typed out a long dissertation about what you can learn from online poker players that will help you get  focused and be better at this trading business. Since it’s been a while since my last blog post I thought it would be good to pass on..here it is unedited.

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I have an analogy that really helps put things in perspective and its something that made me think and realize how to be successful at this business. One of the guys I learned from was a World Series Of Poker winner and also won 3 million dollar trading contests back in the 90’s. I always wondered how trading and poker went together until I spent some time watching my son.

One of my sons makes a lot of money in his spare time playing online Texas Holdem Poker. I play the free games and could never get good at it. I would win big and get my account way up them blow it all. After he graduated from College he lived with us for 3 months until his job in Colorado started. All the while he was playing poker so I sat down and watched him. The way he approached it was eye opening. Instead of thinking this and that and wondering and emotioning he has his system fully worked out.

I dont know if you have tried playing online Texas Hold Em Poker, if not you should try it, in a free environment like Zynga, you will learn a lot. OK i digressed..now back to the story about my son. In online poker when you are playing you can look at other things on your computer and when its your turn the poker table screen pops to the front. He would be looking at other things and when its his turn the screen pops up, he can look at the table, what his cards are, where he sits and what the bets are and know in a second what he will do and he does it. Its automatic and boring. He has a defined methodology and does it over and over. Boring and emotionless. He started out making some mistakes and over the months and years learned and tuned. Because its automatic he can play 3 or 4 games at a time.

You wonder how me and others can trade in and out of several stocks at a time either intraday or semi-swing. Its because we can look at the charts and the wind and instantly know what to do. You need to do this too.

Maybe try poker 🙂

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Watch The Gaming Stocks – But Choose The Right Horse

Posted by lasertrader on April 3, 2011

It’s time for another Sunday Sector discussion… “The Macau Effect”

The word out of Macau on Friday about the better than expected gaming revenues lit a fire under the gaming stocks from the open. In the past, news in this sector has produced very nice gains for some of the stocks in the sector. But the gaming sector can also be fickle. The gaming stocks should be in play this week and may produce some very nice gains for traders who work the sector. The trick is to know which horse to place your bet on.

I watch the Stocktwits stream and see all the gaming stocks being posted by many people. Most of the charts look technically sound and have nice breakout patterns but traders may find that there will be some disappointments with failed breakouts or lack of performance of some of the stocks in the sector. Personally, I like to trade on solid catalysts like this especially when it relates to the company’s bottom line. My advice is to take some time and do your homework. Its easy to find setups in the gaming sector, but this is more a Macau play than an across the board gaming play. In fact, an argument could be made that the Macau effect is taking away revenues from the U.S. Markets. With that being said, focus your trading on the companies that will benefit from this catalyst directly and not the ones that are just hitching a ride with the sector move.

The companies with Macau exposure include WYNN, MPEL, LVS and MGM

The companies with only U.S. exposure that are just going along for a ride with the sector include BYD. ISLE, PNK, PENN and FLL .

I won’t post the charts because they have all been posted numerous times on Chart.ly . I personally initiated positions in WYNN and MPEL on friday and will add on strength.

Sometimes when there is a lot of attention being paid to a sector directly, its often good to see what collateral stocks might make a stealth move while all eyes are looking at the most well known trading stocks. This week I will also have my eye on IGT who is a major supplier of the electronic gaming systems to the Macau marketplace. The IGT weekly chart is cleaner to look at. A break of 16.80 could see 19 or more.

Another supplier to the Macau casino operators is SHFL. Bring up a daily chart for the close in view. I think the monthly chart gives a solid picture of where it has been and where it could go if 52 week highs are broken.

Have a good week and keep an eye on this sector. Even though the market may rest a bit here, the gaming stocks often will ignore a pullback in the general markets. As always, trade what you see and not what you feel or hear.

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Question for the Stocktwits Stream

Posted by lasertrader on March 6, 2011

No setups today..no sector play..just a question.

Although I strive to be mechanical and simple in my trading style and avoid as much “noise” as possible I admit that at times I am a Stocktwits junkie. My recommendation is the same as all the other seasoned professionals on Stocktwits….use it for idea generation…develop your own repeatable methodology…plan your trade and trade your plan.

With that being said, Stocktwits has done what no other medium has done for traders. It has assembled the best of the best in this business and provided them with a forum to exchange ideas, challenge each other and even pat themselves on the back for  the unbelievable amount of profitable advice they share with all of the “listeners” from newbie traders to the old timers. The stream includes current and ex fund managers that manage sums of money many of us only dream about, there are well known analysts, extremely knowledgable economists, ex Mutual fund managers, current and ex brokers..this incredible list of disciplines goes on and on. It doesn’t get any better than this. One would think that with all this knowledge, experience and firepower any market and trading question can be answered by the community.

This brings me to my question…with all this knowledge in one place, why is there still reference to “the smart money”, “they”, “the big money”. There seems to always be some big unknown, unidentifiable entity that controls our destiny, the market direction, and our trades.

If “the smart money”, “they”, “the big money” aren’t part of this vast and knowledgable Stocktwits community, who are they and where can they be found? I wan’t to know so when the market turns against what the stream is suggesting and it was the “smart money” that made it happen I would like to know in advance.

The answer to this continues to elude me.

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The Justin Mamis Sentiment Cycle – Every Trader Needs This On Their Wall Over Their Desk

Posted by lasertrader on December 28, 2010

Back on December 13 my friends who like to like to classify stocks as “leaders” were telling me to buy CMG. “Its a leader” they said. “and its right at support. You can’t go wrong. The indexes will not go up without the leaders and everything looks nice for a continued move up”. When I said I wouldn’t touch it they argued with me that the furthest down it will go is the 50ma on the daily chart and will springboard from there. I still insisted that I wouldn’t touch it and told them I would tweet out the reason why. That evening I posted the following chart to chart.ly.

The chart in the inset is The Sentiment Cycle first described by Justin Mamis in his book titled ” The Nature Of Risk”, 1991. A more detailed description of  The Sentiment Cycle is provided at the end of this article but for now I just want to mention that it is one of the few pictures I have on my wall in front of me over my trading desk all the time. As I look for pullback buys I am constantly watching the charts to see where it is in this cycle. Over the years it has amazed me how many times I have seen it played out over and over. Here is a better look.

When I looked at CMG that day I couldn’t help but think that it looked like it had just passed the “Enthusiasm” stage and was ready for the drop that it might not recover from for a long time. This is what the CMG chart looks like today.

See how the cycle is playing out? Nothing is a given, but because experience has taught me that this cycle is seen more times than not I will always give it the benefit of the doubt so I am not the bagholder that buys into the “leader” just when it decides it isn’t going to lead any more.

Just for fun, lets look at some that may be following the cycle so we can track them over time.

AEM

NFLX

RIMM

OK, you have the picture now. Print out a copy of  The Sentiment Cycle and put it on the wall over your trading desk. I can assure you that it will keep you out of trouble more times than you can imagine during your trading career.

Here is a more detailed description of The Sentiment Cycle for those of you who would like to understand the psychology behind it. ( From a presentation By  FuturesTechs.co.uk here )

Returning Confidence

By the time confidence is fully restored, the markets have been rallying for some time. They start to get choppy and retracement moves get consecutively more fierce, each one more intimidating than the last.

Buying the Dip (The Big Dip)

A huge pullback now gets underway, even larger than the scary one you may have witnessed last month or so. After such a dynamic bull run, investors are willing to take on a phenomenal amount of risk, and the smart money buys the big dip. Also, money is still flooding in from the general public, who likely read in The Sun that stock markets will remain strong for all eternity.

Enthusiasm

At this stage, all economic data still supports the idea of higher prices. Traders who didn’t get involved in the last-dip buying opportunity now have hard evidence that it worked before. All of the traders who wanted to be long are now long (there are no more buyers), causing prices to decelerate. Distribution starts to take place, i.e. stocks transfer hands from smart money to stupid money—strong to weak.

Disbelief

Traders start to get that gut-wrenching feeling that something may be changing, but the fundamentals still don’t back this up, and people cling onto hope alone. Analysts start to get subtle warnings. Maybe previous market leaders start to break below important support levels or moving averages.

Overt Warning/Panic

Typically there’d be a catalyst here (i.e. big banks like Lehman Brothers start to file for bankruptcy… sound familiar?). The index will break below a previous reaction low or maybe the 200-day moving average. News readers will be telling the world that the fun is now over. Intelligent investors start to sell rallies, giving stock prices little or no chance of any recovery.

Discouragement and Aversion

Prices have been rattling off for some time now as the general public starts shedding stock and the short sellers are stronger than ever. There’s no good economic news flow and everyone thinks that stock markets will go down forever.

Wall of Worry

Certain market sectors will now start to bottom out as everyone who wanted to sell has done so. The smart money now starts to move in slowly, resulting in the market pausing for breath or drifting along sideways for a few months. There are no sellers left; so despite the bad news flow, markets start to creep higher. Short sellers start to cover their positions, adding fuel to the fire.

Aversion to Denial

Markets start to trend upwards. Short sellers start to get concerned that sentiment has changed. With no sellers above the market, these sorts of moves can be fast and sharp and tend to leave people behind.

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How to find good setups before 4% breakouts by Lasertrader

Posted by lasertrader on December 19, 2010

I have the ultimate respect for Stockbee and his service. I have learned more from him to give me an edge than any other “mentor” in all the years I have been trading. Here is a copy of a post I made in his private subscription blog that has been made permanent in his Trading Guide. If you haven’t heard of Stockbee, you should check out his free blog and consider subscribing to his service. Its not a stock picking service. He teaches you how to do it yourself. You need to make a commitment to change if you want to profit from his teachings.

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How I get the jump on getting into stocks that end up in the Stockbee Trend intensity Scans.

I thought I would share my methods on how I get into stocks earlier that end up in the Stockbee Trend Intensity Breakout list. As an example I will use BRKR which showed up on last night’s Trend Intensity video. If you look at my twitter stream you will see that I tweeted that out on Saturday and was able to enter it yesterday at 15.58. There is no doubt that the stocks that end up in the Trend Intensity scan can run for 2 to 3 days but with Telechart delayed scans and scanning intraday, the stock has already run 4% by the time you see it and by the time you put the buy order in it often has run a lot more.

Stockbee has trained us to quickly recognize chart patterns that lead to good moves. Contrary to what is discussed here, Dan Zanger only uses the $1 move strategy for intraday scalping. The way he makes his money is scanning a list of charts each night looking for specific patterns, deciding on buy points and during the day when the buy point is hit and the pattern is playing out he checks volume and buys if volume is supporting the pattern play. This takes some elbow grease but if you are willing to do it you can get into the Trend Intensity plays 4% or more earlier than the Telechart scans will get you in.

To do this I go through this process. Each weekend I load the following lists into Telechart.

From Bluefin: Post Earnings Surprise, Sector 50, Emerging 50, Short 25 From IBD; IBD100 and a list of “New America” stocks that I manually keep updated.

The key to this strategy is having the best list of stocks that are strongest in the stronger sectors. Thats how Bluefin and these lists come into play. There is a lot of overlap in these lists but thats fine with me.

I then visually click through the lists looking at the charts. As Stockbee says, after you do this enough, you can recognize a good setup pattern in less than a second. Since you know what setups can create powerful moves, you can see potential breakouts before they occur. Here is the BRKR chart after the fact  BRKR came from the IBD 100 list.

On Saturday I saw the long horizontal consolidation and in Freestockcharts I drew the trendline across the highs of that consolidation. Then I put an alert on that line so that if price crossed it I would be told by Freestockcharts that a breakout is occurring. After I got the alert, I quickly look at volume and volume buzz to see if there is very good volume supporting the breakout and if so I push the buy button.

Another example was ZUMZ that I got off the Sector 50 list with the trendline I drew and alerted. I got the alert, checked volume and bought right away. Here is the ZUMZ alerted line I had set up.

Scanning all the charts and setting up the alerts takes me about 30 minutes. Then each day I all I do is sit there and wait for Freestockcharts to tell me what is breaking out and what I should trade. These alerts were set over the weekend and they may not have triggered on Monday, it may have been a few days or maybe even never that they trigger but they are all “probable” setups that I have Freestockcharts monitoring for me. I have nothing to do all day other that wait for alerts to trigger then to quickly decide if I want to get in the trade. I play a few more defined patterns than are discussed here but horizontal consolidations and flag pullbacks are the most profitable. Again, the key is to have the right list of “Trend Intensity” strong stocks as your basis.

I know this is more of an elbow grease method but in reality it takes an hour or so on the weekend to set up the lists and do the first review setting alerts and then each night it takes about 30 minutes. The end result for me is that I get in sooner and grab even a good portion of the first 4% move.

Thought I would share how my day to day plan goes. My work is done at night then I wait for Freestockcharts to tell me what to trade each day.

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Semiconductor Equipment – The Next Good Sector?

Posted by lasertrader on October 23, 2010

My first Sector I blogged about was India which did very well over the next month. Then came grains which also ran nicely after that post. This weekend the semiconductor equipment manufacturers are in my cross hairs. Sometimes a few data points will get stuck in your head and they wake up some others that you may have been accumulating without realizing it.

About 2 weeks ago when everyone was gaga over Google I remember tweeting out a chart of the SMH mentioning that we shouldn’t overlook whats going on in the semis and how they were poised to move up. Well I forgot about that tweet until last evening when I had StockTwits TV tuned into Brian Shannon’s Friday evening wrap up. He posted a chart of the SMH which stirred up a lot of thoughts I have had over the past couple of weeks. Lets have a look at the SMH. It has a cup and handle formation coming up out of a bull flag pullback to the 20 ema and about to break a 4 month resistance line (wow that’s a lot of technobabble). The 52 week high is less than 10% overhead as a first target of this move.

From where I sit this looks like a very nice setup. If you are in the camp that says the NASDAQ is going higher, you need to look for a sector that will be behind the next push. There has been lots of attention on Google and AAPL and the Networking companies but the semis seem to have taken a back seat with Intel only now starting to claw its way from its post earnings gap down.

So, what else caused me to look at  the semis a little closer. Well, one thing that has stuck in my head was that I have heard on conference calls from CSCO and AAPL that they are having supply issues that constrain their ability to meet demand. This article from Venture Outsource mentions the same and also cites TabletPC’s and Smartphones being a distruptive factor increasing demand faster than was planned:

“Over the last six months, technology companies like Dell, Nokia, and AT&T Mobility have announced adverse impacts on their respective abilities to meet consumer demand due to semiconductor chip shortages.

Shortages have also adversely affected financial performance of the above companies the last two quarters.

Chip shortages have also affected vendors’ abilities to deliver equipment to carriers like AT&T Mobility resulting in AT&T Mobility being unable to upgrade its network quickly enough to meet consumer cries for better performance, all of this taking place in the world of semiconductor manufacturing – a cyclical business requiring long lead times.”

Two weeks ago Gartner said ” The automotive semiconductor market is expected to grow by 36.4% in 2010, to reach $21,364 million, in sharp contrast with the 21.7% decline in 2009. ”

I’m not an analyst and all of the data I am mentioning is qualitative and I may be totally off base but whenever I get a feeling about something I need to keep a watch on it.

OK, if you do your own work you can search for a list of SMH components and chart them all up and chase the ones that are running higher. For me, I prefer to focus on a smaller universe so I’m going to focus in on a sub theme of the Semiconductor Equipment Manufacturers as the laggards that will steadily catch up. Again, two things that spin in my head is Intel announcing they are spending $6-$8 Billion in a new manufacturing facility in Oregon and a friend (@szaman on StockTwits) pointing out the chart of LRCX. Lets start with a multi timeframe look at LRCX

LRCX Monthly

LRCX Weekly

LRCX Daily

Needless to say I really like this stock. Here are a few more..I am posting weekly charts to give a better look

UTEK Weekly

KLAC Weekly

TER Weekly

NVLS Weekly

VECO Weekly

That’s what I will be watching over the next month. I hope it gives some food for thought. Good trading!

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The Happy Family Theory Of Markets

Posted by lasertrader on October 17, 2010

Just for fun I want to pass on a theory that can be used as a tool in watching for  a sustained market move to perhaps come to an end and pullback or reverse. It is the HFTOM, Happy Family Theory Of Markets, tool. I learned of this theory several years ago from a poster on Silicon Investor and IHub that goes by the name of ajtj99 . To the best of my knowledge it is ajtj99 who named it and popularized it.

The Happy Family Theory Of Markets is simple. It states “If one major index makes a new high or low, the other indices should eventually follow suit.” This theory can be applied in different time frames but for this discussion we have all recognized that the Nasdaq 100 (QQQQ) made a new high for the year this past week. Lets now watch for the SPX (SPY), DOW (DIA) and Russell (IWM) to potentially follow suit.

Although I haven’t done back testing on this, I have been watching it for several years and it has played out enough times to stick in my mind as I assess how long a move may last.

As I said at the beginning of this article…Just for fun!

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