Tuesday, February 9, 2010

Did the markets bounce enough?

Well, dear readers, the markets bounced....but did they bounce enough to safely say that the bulls have got the edge now? Let's have a look....

Firstly, I don't like how we closed in the middle of the daily trading range. Doesn't really inspire confidence, does it?

Secondly, in yesterday's daily review, I mentioned 1072 as the next resistance level. I am not too encouraged by the fact that we couldn't overcome even the nearest resistance level on a day when the bulls had control.

The volume was decent/average. Not big enough or small enough to provide some sense of direction either way.

Resistance levels (from closest to farthest):


Support levels (from closest to farthest):


As you can see, lots of resistance up ahead, and I have a hard time imagining us crossing all of it in the near future.  On the other hand, MA(200) should provide solid support. Putting both these points together, I foresee choppy markets, making it hard to trade. That doesn't mean there wont be great trading opportunities, but I would just advise caution in holding positions overnight.
Which brings us to the day I had....and what a day it was! As you readers remember, I recommended LCC on Sunday night as a stock to watch as I thought a breakout was a possibility. I took a fairly large position yesterday at 5.88, half of which I sold at 6.07. It closed at 5.93. Now, preempting the breakout and taking partial profits was good trading, something I cant be accused of all the time. But what happened this morning was Stock Gods just smiling at me. All the airline stocks broke out hard today with the sector index ending up ~ 8%. It looked good in the premarket and I wasnt going to get the time to follow the markets for the first couple of hours. I didn't trust the markets to hold on to the early gains (futures looked impressive), so I decided to put a sell limit  at 6.24. I figured over 5% gains for the day should be a realistic target considering the good show in the pre-market.

I didn't get the chance to see the markets until 11:30. I would be lying if I said I wasn't a little disappointed seeing my position sold out early in the trading day and make a high of 6.42 and trading at 6.30. But it took me just a couple of minutes to get over it since (1) I will take a 6% profit anyday! (2) This method of using a sell limit instead of stop loss to protect my gains in volatile stocks when I am going to be away just for a few hours has worked well for me in the past and I cant really complain about it. 

For the rationale behind using sell limit instead of stop loss and when such a strategy could be employed, please read this.

Well, but I wasn't done with the stock....no Sir, not even close. Seeing the stock form a nice solid support base, I again took a large position at 6.31. It's amazing what role confidence plays in one's trading!! From being down in the dumps this time last week to now taking large positions, just because of what transpired last Friday. The stock performed admirably and I sold half of my position close to end of the day at 6.49, which turned out to be the high of the day. The stock closed at 6.44. You might ask if the stock was performing so well, why did I sell half my position. Well, here was my thinking at that time:

(1) I had taken a fairly large position in the stock, and didn't want to spend my night worrying about what was happening in Greece!
(2) I saw that the market was most probably not going to cross over 1072, which I felt wasn't a very good sign.
(3) That's just the way I trade! I hate seeing my hard earned profits disappear, no matter how small they are. This way I took part of my profits, leaving enough on the table to still be in the game if it continues its run-up tomorrow.

So, that's it from me for now dear readers. I will be back later this evening with some more charts. At the end of the day, I am in 60% cash but in a better position than I started, thanks to the mercy of the Stock Gods.

Take care and Good Luck trading!

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