The Reaction

re·ac·tion  (r-kshn)

n.

1.

a. A response to a stimulus.

b. The state resulting from such a response.

2. A reverse or opposing action

 

One of the frequent trading opportunities, each and every trading day, involves stocks that have an unusual move (up or down). These moves can be caused by a variety of events, like earnings or a big contract win. The opportunity lies in the "reaction" by traders to these events which often causes "outsized" moves - price moves that are outside the norm of movement for that paricular stock.

 

Part of my overall trading strategy is to always keep available funds in my daytrade account for such opportunities. This past week, MUR (Murphy Oil Corp) presented such an opportunity as it came under tremendous selling pressure. One could view this as a knife catch opportunity - that would be appropriate.

 

So why do this sort of trade at all? I get questions often that reflect this sentiminent, and I have no issue with that all. It certainly is not for everyone. However, it is my view that these emotionally driven stock price moves present enormous opportunity - when approached correctly and with the right mindset.

 

In the case of MUR, the stock was gapping down in to the mid 60 area (and right through a 50% retracement from the most recent up move). The stock caught my attention based on the volume in the stock up to that point in the day. My process with a trade like this is to start off with a quick review of the chart to determine where I think support will come in to play. In the case of MUR I determined that the price would most likely fall through the 65 level, but after that level I had the expectation that dip buyers would begin to show up. I made an initial buy and then made 2 subsequent adds as it began to recover up through 64 and abv the 65 level. Based on the fibonacci levels for the intraday move, I determined that anything above 66 would be a great exit and scaled out accordingly - once that price target was achieved.

 

 

Monday of this week has started off with another similar opportunity, this time in APA (Apache Corp). This stock suffered through some intense selling on 1/28 (Friday of last week, due to issues in Egypt), but began to show some real buyer interest out of the gate today. I made an initial entry at the break above 115, and then added on a move through 116. I scaled out of 1/2 as it went through 117.50 and moved the stop up on the balance. The stock has moved up through the 119 level as of the close of day today.

 

Good luck on Tuesday as we start a new month, February 2011. Wow, January is in the books folks!

 

 

Down in the Sub

One of the many aspects to trade preparation involves the task of doing stock scans. Many traders use a variety of products either as part of their trading platform, or through 3rd party providers. What I want to highlight today is a particular scan I use to find Stochastics that are bottoming.

In my http://chart.ly/users/1investor chart postings, you may see me note things like "STO bottoming" or "STO curling ^" or even "STO _". I am sure you wonder sometimes what I really mean here. So I would like to provide an example from a trade that I put on last week.

The trade involves AMED (Amedisys Inc). I ran a scan use Stockfetcher to find me stocks that had a Stochasitcs reading under 20. After parsing through the list, I focused on this stock as it was pulling back to a rising 50 dma. The timing of the "STO curling ^" seemed to coincide with a test with that 50 dma. The addition of a hammer being printed on the daily chart gave me several reasons to put this near the top of my list.

The chart for today shows that the stock is testing prior Resistance (as well as the 20 dma) at the 33.30 level and is likely to flag here as it prepares for its next move. I am using 32 as my stop.

So the next time you see a comment from me about being "down in the sub", you'll have some idea of what I have been up to, uh er, down to. LOL

Tools

I have been receiving an increasing number of messages asking for information on what web sites / tools I use in trading. Although some of these encompass other areas of interest to me, they are included as they add value in preparation, market analysis, or information gathering.

http://www.finviz.com/
A site that all traders should use daily. A wealth of information, scanners, market gauges. Did I mention the scanner? LoL

http://www.thepatternsite.com/
I use this site a lot when I want to look at detailed candle patterns, etc. If you are dedicated to candle reading, this site is for you.

http://barchart.com/
For newer traders, the Cheat Sheet section may be of great interest. Another site with an enormous amount of information in one spot. Spend time here.

http://bloomberg.com/
Good source of information, perspective.

http://freestockcharts.com/
I use this site primarily to create my charts.

http://chart.ly/
Site that I post my charts to. The link to my charts is: http://chart.ly/users/1nvestor

http://decisionpoint.com/
Good TA information

http://stockfetcher.com/
I use this site a great deal for my scans. Play around here, you will be glad you did.

http://nytimes.com/

RiverRed

I've spent some time in A/H today watching the FFIV (F5 Networks) carnage unfold, as well as reviewing the RVBD (Riverbed Technology Inc) trade that I put on earlier today. My plan for putting a trade on in RVBD centered around it holding above the 38 level. Once I felt that It was doing so, I elected to sell the FEB 38 put for 2.60. I did not mind owning it at 35.5 essentially, if put the stock - for some reason. To finish off the put spread, I bought the JAN 34 put for .10c.

In reviewing the chart, I could see a rising 20 dma & 50 dma  (moving average) below coming up to the price area. I felt for sure that one of those levels would hold if something dire happened. Oops. 



Now I find myself with RVBD trading just above the 33 level in A/H. Clearly I am at risk of being put that stock, but I do own that JAN put that is now ITM (in the money).

Know your options

I get a little extra cautious, nervous, and excited during OPEX week. The expiring of options add a lot to trading during the week as traders position themselves - and deal with trades that may be expiring. This week has an added dimension in that 2 of my trades are in stocks that have earning releases: AAPL (Apple Inc) & GOOG (Google).

To make things even more exciting, AAPL had some significant news come out over the holiday involving their CEO Steve Jobs. He has taken another medical leave of absence. I spent a fair amount of time coming up with my trading plan for AAPL today as I viewed it as a great opportunity. I ultimately decided to sell the FEB 300 put and buy the JAN 340 call once the market opened. The trade lasted less than 20 minutes and provided a net of 6.80 on average (scaled out). I then reviewed the action up to that point and elected to wait for the JAN 340 call to retrace (which it did) - I then picked some up at 5.60. I will hold these through earnings amc.

In terms of my GOOG option trade, I began to think that this may get even more attention because of the negativity towards AAPL that some may have. The action so far today solidifies that view. I currently have the following trade on:

L JAN 660 call
S JAN 590 put
L JAN 575 put

The above trade was done for a net debit of 1.90

There are a variety of ways to play these earnings releases, you just need to know your options.

You don't know Jack

I spent some time this weekend reviewing some of my worst & best trades in the past month. One that really stuck out in terms of gains in LEARNING was with my trade(s) in JOE (Saint Joe Company).

In late 2010, I was short JOE - that is what the chart was telling me, and I didn't see any reason to believe otherwise. However, I came across a tweet that @toddsullivan was going to be doing one of his shows where he was going to cover a JOE presentation. Excellent.

The information provided was incredibly valuable, but man was I now a nervous short! LOL

I took several days to digest what I learned from his review and decided that I would cover the trade. This was during the middle of December, and the chart was just flagging anyway. I continued to watch the chart to see it find a nice new base - buyers where coming in. I began a long position, scaling in, as the chart began to firm up. I had a full position right before the end of the year.

I have been amazed at the strength of the stock this year so far, but feel that my gains in learning here are just as important as the gains in stock price.

Now I do know JOE.

Planet Earth

Rare

having low density; "rare gasses"; "lightheaded from the rarefied mountain air"

There is much debate as to the real opportunity that exists in the Rare Earth minerals industry. I have played both sides of the debate, Long & Short, in a variety of public stocks. REE (Rare Element Resources Ltd.) was my first stock to trade back in 2010. As MCP (Molycorp Inc) came in to the picture, I traded it as well. SHZ (China Shen Zhou Mining & Resources Inc.) was the latest to get my attention.

I began the new year with a review of what I wanted to focus on in 2011, and this industry was in my Top 5. I currently have a bias that is negative on the industry as I believe Mr & Mrs. Euphoria have moved on - and so they should imo.

We need to see real earnings, heck real earnings potential, before I change my view. For now I am short MCP via being long FEB 45 strike puts.

If you disagree with me here that is fine. You want to be long stocks in this industry, I won't stop you. Just be sure to use options to protect your position. Or at least keep a stop in place. And oh, good luck.

Shoo Shoo

I have received several messages today regarding the recent SHOO (Steve Madden) trade, and thought I would go over the process in more detail.

It is true that this was in the Knife Catch category as I caught the down move too late to short. Those that were short, congrats. My view here was that it would need to find support, and hold, above the 40 level. I posted several charts on Chart.ly with this being the latest: http://chart.ly/cfhwgnr

Once I had seen 2 days of buyers coming in, I put on a Long position. Today the stock gapped up and is currently at 42.65 (as of 3 PM EST). I have sold 1/3 at 42.5 and have raised my trailing stop to 42 on the balance. The stock has avoided the 50d all day, on the 5m chart.

Other Knife Catch trades that I am currently stalking are: MCD & FDO.

Setting Goals

First, I'd like to thank those that take the time to follow me. I am not sure what your reasons are, or what you expect to get out of following me, but thank you nonetheless. If you do ever have a question, comment, criticism, gripe, whatever, just holler.

Secondly, as my follower list grows, I do see an increasing number of questions come my way. When reviewing these questions from 2010, it became apparent to me that many can be summed up into just a few categories. One such category has to do with Setting Goals.

So why is this important to set goals? Isn't the main goal really simple, make a profit?

Seems simple enough. Unfortunately, it far from simple. Because of this, you must decide each year what you want to achieve. Some examples below should provide food for thought:

• Do I want to learn options? Would that help my performance?
• Do I set a target profit goal? Percentage or $ Amount?
• Do I set a goal for my # of trades each quarter? Does that help me stay focused?
• Do I need to read more trading books? If so how many? Which ones?
• Should I join a chat room? What would I gain from that?
• Should I review my Trading Journal each week? For how long (2 hours, 4 hours?)?
• Should I do x # of hours of Fundamental Analysis each week? Increase this # if already doing it?

As you can see from these few examples, there are many aspects in goal setting each year that should be addressed - I've touched just a few of the many areas. You decide for yourself what goals to set, try to come up with at least 5.

Remember, they don't all have to address a shortcoming. You can set a goal that it designed to expand something that you do well.

Doing homework

I have always liked school, and never really minded the homework that came a lot with it. Now I find myself doing a thorough review of my 2010 Trading Journal and it seems so much like homework this year. I have gone much deeper in the review, and feel that the additional review time is worthwhile.

There are many things that I learn from the process, but this year I find that many of the things learned can be summed up in to one key element: preparation, and the improvement of that, produced much greater results from trade performance.

Repeat:  preparation, and the improvement of that, produced much greater results from trade performance.

A few surprises in the review:
1) An increase in option trades, especially selling put spreads
2) An increase in performance from the more difficult trades like Knife Catch & Gap Fill trades.
3) An increase in short positions taken when compared to the prior 5 years. This may have to do with the market trend changes throughout the year.
4) The unexpected benefit from the use of StockTwits. What a pleasant surprise.

Now that I am wrapping up the 2010 review, several things are apparent to me for 2011.

• It is likely that many stocks are topping, and thus there may be an enhanced number of solid short opportunities in the coming months.
• I also see less put spread sale opportunities going into the new year, but certainly there will be some.
• Finally, I expect to incorporate more weekly option trades.

 Let's get ready to rumble.