It seems that we are finally starting to turn. The overly talked pullback may be on its way. It started with the SPYs gaping down Monday with a failed attempt at filling the gap. Yesterday we closed below the trading range we had established for a while. Today we got confirmation by cleanly taking out yesterdays low and holding for the most part below 92 (give or take 10-15 cents up until 3pm).
I also like the fact that most sectors are trading down in unison as opposed to having money flow from one sector to another. I read in a few blogs this weekend that some of the shorts who sweated it all this time were starting to throw the towel and felt discourage by the lack of follow through. With technicals coming off overbought conditions most were planning to get out and reevaluate before the next up leg.
Today I wanted to highlight one way to trade a turn in the market to take full advantage of the weakness that may come ahead. As an active trader sometimes I am victim of trading the one stock that is acting too weak or too strong and will not follow the market. So for a market play I like to spread my bets amongst the weakest of each sector at prices where the risk:reward is favorable or be in stocks trading below important key levels.
Take for example today: I missed hitting SPYs below yesterdays low so I waited patiently for an entry. I noticed it was having trouble holding firmly above 92 (hold below way below the 92.5, a huge sign of weakness!!) so I started core shorts on a basket of stocks. I started small shorts with a lot and half in STI, JPM, AAPL, RIMM, FCX, GS, MS, HIG, and BBY – All stocks I have been following/trading lately. I didn’t open all the positions at the same time unless they happened to be near resistance levels. This latter point being key. I wanted to make sure that I wasn’t just shorting all the stocks just for the sake of being short the market. I wanted my bets to make sense from a risk:reward perspective. Some of them didn’t go down much (BBY), some of the stocks just happened to range (GS, AAPL, MS, JPM), some happened to be weak (RIMM, FCX), and some were relatively stronger than the market (HIG). But for the ones that didn’t work out I never really took much pain. I didn’t take pain because I waited for safe entry points!
Yes there is such a thing as spreading yourself too thin when you have too many positions. However having a group of guys around you who constantly talk about the stocks they are in helps a bunch!. A certain level of focus is required to pull this stunt but with a bit of practice you would be surprised it is much easier than you think.
The beauty of incorporating this into your style is that it allows you to fully capitalize on a huge market move. It keeps you from micromanaging positions AND lets you identify the one/two stocks that are acting the best that you really want to lay into. I was able to identify RIMM as the weakest of all my positions and was able to capitalize on the down move in the close, though the SPYs actually traded up through 92 for a good part of the close.
So do your research, find a few stocks acting weak or trading near/below significant intraday levels and wait for the setup in the market to come again. It could be that we gap down tomorrow, we test today’s lows and we can use that as an entry for a market short. Let’s get ready to party on the short side. Happy Trading!
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