No Pain, No Gain - A Stock's Volatility is Key

One of the hardest things about short-term trading is deciding when to exit a trade that is going against you. If you're at a 5% loss, is it time to get out? Should you wait a little longer if you think the trade will start moving in the right direction?

I think it's important to plan exactly how much you're willing to lose in a trade, and then follow through with that plan. It is equally important, however, to know what kind of stock you're dealing with, ie. the volatility of the stock. For some stocks, 5 or even 10% daily price swings are the norm. On the other hand, you have stocks like General Mills - GIS - that will typically move 1% or less on any given day. Therefore if you're trading a high volatility stock, you need to give it a little room to move in order to avoid getting forced out of the trade prematurely.

As an example, take a look at the chart for LJ International, Inc., symbol JADE. At the beginning of the month, this stock showed up on the StockCharts.com Bearish Engulfing Pattern Stock Screen. The stock was also falling from resistance at the 50 and 200-day MA's on higher volume. These were great reasons to short the stock.

Let's say you saw this bearish action and got short at the end of the bearish engulfing day at $7.56. Now you have to decide where to place your stop to protect yourself from losing too much money. A good place for a protective stop would have been above the highs of the entry day, around $8.43. But $8.43 represents about a 12% loss - which is quite painful. When trading a highly volatile stock like JADE - no pain, no gain. I crunched some numbers and found that over the last 10 months, on any given day, the difference between JADE's high and low was on average about 7%. If you hadn't taken this into account, you probably would have gotten scared and taken your loss. You would have missed out on monster profits.

Here's a daily chart, showing the sweet 47% profits that could have been made.
Here's a 30-minute chart showing the pain before the gain:

DJIA Will Top 14,000

I think the DJIA is going to blow by its previous record of 14,000 in the next few weeks.

HUGE Day for Wall Street!

Today was a momentous day for the stock market. Here's a run down:

• The Federal Reserve lowered the federal funds rate by 50 basis points to 4.75% - the first cut in over 4 years.
• The DJIA jumped 335.97 points, the largest one-day jump in almost 5 years.
• Gold is near all-time highs.
• Crude oil has a record close at $81.51/barrel.
  

Here's a look at the sectors that performed the best today, thanks to Google Finance.
Basic Materials stands out - up 5.24% today. Here's a very basic summary of what's happening, from my understanding: As interest rates move down, the dollar as a currency loses value because it becomes unattractive as an investment. Since many commodities are priced using dollars, a falling dollar means they go up in price because it takes more dollars to purchase them. I think this is why we saw such a surge in basic materials stocks today.

Companhia Vale do Rio Doce, symbol RIO, was up almost 10% today, an all-time high! CVRD is a diversified metals and mining company out of Brazil with a monstrous 286 BILLION dollar market cap. This is a stock that has DOUBLED since the beginning of this year. It has been in an uptrend channel for an entire year. After today's jump, I'm hesitant to trade it. The momentum will probably carry it higher, but it is running up against the uptrend roof.
Take a look at the chart:
Freeport McMoran, symbol FCX, is another materials company that has DOUBLED since January. Today it was up over 6%. I think this one might have a little more room to run, and I might have to buy some tomorrow to trade the upward momentum in the stock. It just broke above resistance at $100 on healthy volume. Check out the chart.
The Capital Goods sector includes companies from several different industries, including the homebuilders. Hovnanian, symbol HOV, was up about 28% today! HOV is a homebuilder with about a 900 million market cap. I really like this chart. The stock has been in a downtrend for about 2 years, but it is bouncing from its downtrend floor. Recent volume was climactic, suggesting most of the sellers are out. I wouldn't mind making a small trade on this one, however, the stock could go to ZERO, so I wouldn't put in more than I'm comfortable losing completely. Look at this crazy chart.
As I'm looking through the stocks in these various sectors, I don't really like the way that Google Finance has them grouped. Stocks in totally unrelated industries are grouped together. I need to find a better way of looking at stocks sector by sector.

Trade Using Multiple Timeframes

Multiple Timeframes Can Multiply Returns
This is an interesting acticle on trading using multiple timeframes. This is a strategy I use to fine-tune my entries and exits. The problem is it's sometimes difficult to constantly monitor intraday charts at work - so I rely more on daily charts.

I found this link on the Trader Mike blog.

FLUOR up 77% Since January - Time to Sell?

Take a look at the orderly uptrend in Fluor since the beginning of this year. In January it traded at $75. Today it made a record close at $133.25. That's about a 77% gain - the kind of gain that makes you want to slap your Grandma. Luckily for my Grandma's, I bought 30 shares at $110 - a measly 21% gain.

But 21% isn't bad either. Am I being a pig? Is it time to take profits and move on? Or flip my shares (sell my shares now, then buy them back lower)?

After looking at the chart, I think perhaps I should sell. Here is my reasoning:

• The stock is running up against its uptrend roof.
• Today's candle looks like a shooting star, a bearish reversal candle.
• The stock is overextended - way above its 50-day, stochastics overbought.
• I am satisfied with my 21% gain in under a month.

I want to preserve my gain, but on the other hand, I don't want to miss out on a continued move to the upside. Therefore when I sell, I'll need to be looking for a good time to jump back in, after the stock has "digested" its recent gains and is ready to run again.

Take a look at this sweet chart:

Mixed Signals from Yamana Gold - AUY - To Short, or Not to Short?

Today would have been a good day to short Yamana. Last Friday it finally gave some "bearish confirmation" - a bearish engulfing candle, stochastics hooking lower, and the MACD Histogram going lower. Getting short this morning would have been a great trade - it touched $12 then it was all downhill from there.

Getting short now, however, is riskier. It looks like it is getting support from the 50-day MA underneath. Also, volume was climactic last Friday, and if you look at past instances of climactic volume you will see that it coincides with a mini-bottom - ie. the stock bounces after the climactic volume. A close below the 50-day tomorrow would be quite bearish - I'm thinking that won't happen.

Check out the chart:

DOW Falls 250 Points

The DOW chart is looking bearish. Check it out:

Yamana Gold - AUY - Lessons in Selling Short

Wow. Check out this crazy chart for Yamana Gold (AUY). The stock was up 6.52% today. If you had went long on the day of the "mini-crash" on August 16th, buying shares at $9, you would now be up an incredible 39%.

The stock has been in a downtrend channel since April. Yesterday you may have looked at the chart and thought it was a good time to get short - AUY was bumping up against the downtrend roof, and it couldn't close above it. Today it broke out of that channel on heavy volume.

So how would you have known yesterday that getting short was a bad idea? Simple - you could have looked back at days when shorting ended up being a good idea. Then you would have seen that yesterday, unlike the other days, lacked bearish confirmation.

Bearish confirmation includes:

• Stock falling from 50-day MA
• Stock falling from trendline roof
• Stochastics hooking down from overbought (80) territory
• MACD Histogram heading lower
  

Click on the chart to read my explanation.

Schlumberger - SLB - Making New Highs

I panicked and sold my SLB on August 16th, the day of the "mini-crash" at about $85. Now it's making new highs and trading around $100. That's 17% I missed out on! Me Idiot. I'm thinking about getting back in, but the chart tells me to wait. It is extended and overbought - I think it will trade sideways and digest the recent gains. If it drops enough maybe I'll pounce. Check out the chart.

DJIA Smack-PWND by its 50 Day Moving Average

The 50-day MA is making the DJIA its bitch. Check out the chart. I'm slightly bearish on the DJIA until it can show the fiddy-day who's boss. If it falls, it should find support at the 200-day, around 12900.

Garmin - GRMN - Trying to Make New Highs

I still own 30 shares of GRMN and I'm up about 17% - time to sell? I think I want to hold this stock at least through the end of the year, and possibly longer. So if I do end up selling, I will only do it to avoid a short-term decline - and when that decline is over I'll jump back in.

But how would I know a short-term (1 to 10 days) decline is coming? And how would I know when to jump back in? Very good questions - I would try to anticipate the price movement by examining the chart and the technical indicators.

Take a look at the chart:

I'm going to wait and see if GRMN can power through resistance at $105 - today it tried to break through this level for the third time , unsuccessfully. GRMN has formed what is known as an Ascending Triangle - a bullish chart pattern. The moving averages and the trendline are rising up underneath - they may help GRMN break through. I don't like the looks of the MACD lines or the OBV line, however. They are weakening as GRMN is treading water. If GRMN breaks through into record territory, I may consider buying more. If it closes below its trendline, I may consider selling.

Dow at 50 Day Moving Average

The DJIA closed right on the 50-day MA today. If it can follow through, I think it could make it to 13,700 within the next week or two. The 50-day MA is flat, and it could act as resistance - so we may actually see a drop. We're kind of at a crossroads here. I think you could make bets either way.