Question from a reader sent on June 4th, 2010:
hi, guys! i want to ask u a specific thing about trading crm on the open today. crm was very strong yesterday, 93 – huge support. Due to weak market the stock opened below 93 and started to bounce on strong tape. i bought some at 93, sold 94. i made a point, that’s nice. i missed another two points – that is not so nice. so my question is: where should be my upside target for this type of morning trades based on yesterday’s chart?

Answer from Gman:

Thanks for asking a great question. We all have very different appetites for risk, trade off different time frames, have different holding times, etc so there is no right/wrong answer here. I think the most important thing to consider is that you have to be consistent with your time frames. If you made the trade looking at the daily chart because the stock broke out on heavy volume the previous day and you are interested in buying the pullback then there are two possible targets: 1. the previous day high, 2. the next level of resistance above yesterdays high as seen on the daily chart – if none available (all time highs) then you are holding until a new level is established.

However if you are using the previous day setup (trade strongly through new all time highs) as a way to have a bias and want to make trades on the long side for the next coming days then you have to stay consistent with the time frame you are using for your trading decision to pick your targets. For example, if you are trading off the 15 min chart then I see support at 92.90-93 with resistance around 94.25-94.50 and 95.7 – all possible targets. if you are working with a 30 min chart you can tell that 93 was a bit of a flag the previous day so buying the pullback there the next day gives you the previous day high as a target. If you are trading off a 5 min chart then obviously there will be many other levels that will make you sell “too early” when you look at the price action at the end of the day.

The reality is that you made a great trade. Great job identifying a great stock showing relative strength and buying the pullback/gap the following day where the market could drive right on the open. We all wish to capture the whole move of a trade, but in the end just remember that a sale, is a sale and is sale if it reaches your target. You can’t be mad if the stock went further if you were trading in a smaller time frame that does not account for such a large/extended move. Hope that helps.