We distinguish three complementary yet wholly different plays.
1> We have the purely momentum play (i.e. PLUG, SIFY, NEWP) as opposed to the Earnings Play (i.e. LTXX, ORCT, GILTF, NTAP, CMOS, JDSU, SDLI, ABSC, TEVA).. The momentum plays lasts from 3-10 sessions, usually bombs with no warning and has lots of 'shorters' just waiting to pounce although they usually time the market wrongly. Their dips are about as long as their surges.
2> The Earnings Play (esp. those that have their first positive quarters or are earning over 30% quarter after quarter in acceleration) These plays enjoy increased profit margin after tax, cash flow etc, Return on Equity etc. They can and do last for months and have dips of 3-7 sessions before surging again. They actually become momentum plays just because their chart patterns show solid technical rank as well as strong fundamental rank. We call those plays the techo-fundamental plays and they are the best. Here we also have a stock like BOBJ which surged from 66 at the buy triggered (called on SI) almost straight up to 124 in just a handful of sessions. They are usually but not restricted to mid- and small cap companies with relatively low floats. Their products are #1 and they are leaders in their sector, (i.e. SILI, QLGC, JDSU, etc)..
Because the market is very capricious and sometimes favors stocks like NEWP, SIFY, PLUG we should go along with the trend so we can trade every day and not just wait for the fundamentally strong stocks to trigger buy signals. The only restriction for our (or any) momentum plays is a keen understanding that you are in ONLY AS LONG AS THE TREND IS UP.. You don't make any long range plans, take an extended vacation, etc. Stops are strictly enforced, morning gap ups/downs are duly noted. Trailing stops are envoked after decent profits to let you get stopped out without danger of holding too long. Many times you will leave profit on the table, but that is better than getting caught in a maelstrom of selling pressure when distribution takes over your stock and there are no more buyers, just sellers anxious to escape.
In the next sessions we will probably encounter both kinds of companies and still another group:
3> The third group are the overbought that we should consider selling short for a period of 1-4 sessions. These 'short term shorty shorts' are easier to follow than long term shorts that suddenly turn positive and gap up scores of points. Track the short term shorts from pre-market, even before you focus on your long positions. What I have begun doing in the last six months was to close long positions and go short instead of flat and vice versa. It doesn't always work but as long as it works more times than not (2 out of 3) you will most likely make a lot more than you lose.
The traders that lose money in these times are those that have limited 'one-way only' strategies and wait for the stocks to conform to their strategies (i.e. short till the death).. and "hold through the losses" because the 'stock will come back'... You have to pull your daily strategy from a 'box of tricks' and attune it to the market climate and not vice versa. The market will not tolerate those with immutable trading strategies. A chameleon approach is what works.
If you are in doubt of what to do, then just stay on the sidelines until the trend is more assured. We are in a trading range going sideways with DOW down and NASDAQ up and that can't go on as it isn't healthy for the market to be so one-sided. That is why the correction took over, one side was bound to join the prevailing trend (i.e. either the DOW would have been up today along with the nasdaq or both would have been down) and today it was the down side. |
