Trader’s Narrative

Final days of the Hedge Fund Operational Due Diligence book giveaway. Follow the link and submit your email for entry into the draw. Yup, that easy.

Here are just a few picks from the past week’s reading list at news.tradersnarrative.com. Follow the link below to get much, much more:

• The Quiet (Lobbyist Lead) Coup
• Eternal Struggle: Stocks vs. Bonds
• Fast Money, Ratigan Jumps Ship (off to ABC?)
• Should You Your Watch Your P&L While Trading?
• Roubini Likes Geithner’s Plan (!)
• The Why’s & How’s of Pyramiding (the good kind, not the ponzi kind)
• Doug Kass: Raise Cash as Rally Pauses
• Simple Flow Chart of Geithner’s Financial Bailout Plan
• What does one TRILLION dollars look like?

And remember to check regularly since there are new links added everyday.

While quite a few traders are using gaps to create watchlist candidates these days. I’ll share one other way to trade a very familiar pattern.

You simply find strong, trending stocks and find a pullback (which is what a dummy spot really is) to buy. Last week I gave a short watchlist of strong trending stocks. Among them was Republic Airways (RJET). It has just broken out and was in ‘open air’ territory. There were no unhappy longs in this bunch.

Since previous resistance had now flipped to support, an orderly pullback to that area would be a good low risk opportunity to climb aboard this trend:

Note that this is more of a swing trade example with a longer time frame (hourly). The stop loss was were I felt it would be clear that the new support had not held.

Put another way, the expansion was on March 15th (Thursday) when the resistance was taken out. The contraction was the following day - when the trade was entered. And the expansion continued in the following days. Expansion, contraction, expansion… now where have I heard that before?

My point in showing this is that you don’t really need gaps (although they are a good pattern too). The important thing is to take an idea, add your own thinking and come up with something which you can call yours. All great traders got there by doing their own thinking and forging their own paths. And thanks to the nature of the market, there are a myriad paths to success.

Take a look at the other strong stocks I featured and you’ll see there were others like RJET.

When the market is weak, it is actually a blessing in disguise because it become even easier to find strong stocks. Here are just a few stocks that I found that have nice looking charts and high relative strength:

BEAV
METH
RJET
AAWW
PRGX
TESOF
DWSN
HDNG
LSPN

Quite a few of them come from the aerospace/airline sector.

Trying to peer into the fog of future price action, I looked at the advance-decline numbers for Nasdaq. Here’s a chart of the Nasdaq along with the daily A-D numbers smoothed over a 7 day moving average:

As you can see, sharp spikes down are usually good spots for a trend reversal (a bottom, either short lived or intermediate). In the past 3 years we’ve had the following spikes (reading below -700):

• mid-March 2004 - small bounce
• May 2004 - small bounce
• mid-July 2004 - small bounce
• August 2004 - intermediate bottom
• mid-Jan 2005 - small bounce
• April 2005 - intermediate bottom
• October 2005 - intermediate bottom
• May 2006 - small bounce
• June 2006 - small bounce
• July 2006 - intermediate bottom
• March 2007 - ???

So a spike in that territory usually defines some sort of oversold. But what determines if it is a bounce or a more solid bottom?

A good tell is the % of stocks above daily moving averages. In each case of an intermediate bottom, both the long term (200 day MA) and the short term (50 day MA) were quite low. This is just a back of the napkin calculation, so what I mean by low is anywhere between 30%-20% or lower.

The only time that this didn’t happen was in last summer (June 2006). Then we had both short term and long term % stocks above MA very low but we had to wait another few weeks for the definite bottom to be carved.

Right now, we just don’t have that. The % of stocks above moving averages is sitting quite high at around 50% and 35% (for long term and short term respectively)

My conclusion after all this is that we are probably seeing a short lived bounce here. We need more capitulation to launch another leg up. So be careful out there.

As the name suggest, Ascent Solar is in the burgeoning solar power sector and today it lighted up just about any sort of filter set for gaps or unusual volume or high trade count. By luck, ASTI was featured as one of the movers and shakers in the daily email I get from QCharts (at around 11 am). The news which propelled it to almost double from its close yesterday was a strategic aquisition of a good chunk of their shares by Norsk Hydro.

Things were ho-hum until the sixth candle which took price back up to the opening range high. The next two candlesticks were consecutively narrower in range, while remaining just below the opening range high (green circle). As price contracted, so did volume (green box).

Finally price broke up above the inside candle’s high (and the opening range high). It continued in an almost uninterrupted rise to reach almost $9 and close just under its high of the day. The combination of narrow range candles and a strong, enduring trend produced around an +8R. All in all, a textbook setup and trade.