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!