1. I first look at the overall market health, as 60% of any stock's move, in general, can be attributed to the overall market. I look at the SPY and the QQQQ, the two index ETFs, as my guides. I see that the markets broke down from their range 2 weeks ago on heavy volume, have made 3 months lows (you'll see the red candle bar on 1/29/10 for both indexes being lower than the December lows) and the 3 day rally from that day was on much lower volume than the preceding downmove (volume bars are on the bottom of the charts). As a short-term trader, the market looks ripe for another downmove, even though it is "extended" from the high (more than 5%).
2. I now look for good risk to reward opportunities along with technical patterns. Because of the sudden and strong downmoves in the market, many stocks are already extended and have fallen to prices where it would be risky to initiate shorts. Some examples of these extremely weak stocks I have been following but are extended include X, CLF, NTES, STP. You can see from their charts that most have come off close to 20%, if not more of their value already. But the one stock that looked decently priced to me, was clearly in a downtrend, albeit not as weak as the others and has a tradeable pattern was PWRD. I have only provided intraday charts to clearly show the pattern but if you look at it's 2009-10 daily chart, and focusing in on the months of September until now, you can see that the stock has not made new highs, sloshed its way in the 40s and has made successive lows. The big price point for this stock is 39 on the daily and intraday charts in this pattern. For the past trading week, it has been trading between 39 and the low of around 36.70. I now have a pattern I can work with. Now begins planning the execution phase.
3. Because all traders are risk-reward creatures, price is very important to limit your risk. I shorted small size at around 38.50 prior to yesterday just to be in the play. While the market was pulling back higher on lower volume, I closely watched PWRD to see how strong it was relative to the market's rally attempt. It always stalled close to 38.80s, but would never actually trade towards 39. In face of yesterday's last hurrah, I shorted 50% of what I wanted my full position size to be in the 38.80s and set a stop above 39. The reason why I did not short all that I wanted at once is because even though the stock is in a range and I am shorting it at a great price, my intention is for the stock to break down out of the range and trend lower, so I want to have some ammo left in my pocket in case that happens. Until then, it is just stuck in a range. After executing the trade, it's a wait and see approach, usually involving me sitting on my hands and telling myself not to cover for the small money, but to be patient for the potential big move.
4. Plans can change after you execute your trade. Thursday happens, leading to declines of 3.09% and 2.89% in the SPY and QQQQs respectively, big percentages for the overall markets. Today is most definitely a day-traders dream, as stocks without news were falling like flies left and right. I did not initiate new shorts because the market opened up weak, creating even larger risk if I were to initiate positions on the weak stocks. So I watched my stock and overall, I was disappointed at how well it held up to the market. The downmove was not on high volume, the price did not reach the bottom of the range and many times, the stock looked like it was asleep. While I will still have my overall position stop above 39, I will cover half of what I have above 38 if the stock will breach that price to lock in some profits and reshort the position if it approaches 39. If the stock continues in my favor, I will add to my position below the low of the range and adjust my plan accordingly depending on how it acts.
Feel free to post comments, I will respond and appreciate every one. Also, if you would like me to discuss a certain topic in my next post, post it in the comment section as well. Until then, never leave home without a stop-loss. If there are any questions on the lingo used in this post, feel free to ask as well.
P.S. For those who know about moving averages, I feel like the main reason why PWRD has not acted very weak is because the 200MA is at 36.16 give or take, which is close to where it is trading now. If the stock breaks below that with heavy volume, I will be a happy man.
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