|
I am not offering financial or investment advice. I am a fellow
investor and trader sharing his thoughts for educational purposes only.
Let me preface this post by saying that this
technique can be very satisfying when it plays out as scripted but also
carries an inherent risk. It is not for the faint of heart. This technique
only works in a very volatile market.
Right now the market has doubled since March
of 2009 and is running into the headwinds that I have expected for the last 6
months. Indeed, I have been very surprised to have seen the market run as far
as it has. My thesis is that when the market is confronted with bad news and
corrects down this is a healthy sign. When a market is confronted with bad
news and continues to rise this is a red flag. I must add that this is only
born out when there is substantial volume. Any movement in the market on low
volume is meaningless. I am somewhat relieved to see this market begin to
sell off on the news of tensions in the Mid East, which are bringing higher
oil and gasoline prices and as a result, higher prices of consumer goods.
As an example of this technique I will use
the stock Uranium Energy (URG). For the past week URG has been trading in a
range of $2.40 (+/-) to $2.65 (+/-) on relatively strong volume. First,
you must do the homework and making sure there are no “Loch Ness
Monsters” in the stock, and then you must check your charts and see
where the key support and resistance levels are.
For the last week I have bought this stock
three times under $2.40 and sold it back at $2.65. I have realized 10% gains
all three times. Yesterday this stock traded in the $2.60 range all day on
low volume. I waited all day and at 3:30 I was able to buy it at
$2.38 while it closed at $2.37 with over 1.3 million shares traded. It is
important to note that this is a classic trend of a stock consolidation
because traders are shaking out the “faint of heart” investors
and consolidating their positions at the key support level. If this stock
acts as scripted I will sell it back today at $2.60 or above. If it does not
act accordingly I will have to patiently wait. I have faith in my charts and
trust that this stock will bounce back.
As I write this, Gold and Silver are both
down along with the miners. I am prepared to see this stock take a further
dip or hold its level because I trust my charts. The best reason to use
charts is that it takes the emotion out of trading. If it does not correct
today, I trust my charts and feel that although I may have to wait, this
stock will bounce back to the $2.65 level. It is important to note that no
matter what happens I will not add to my position at lower levels. My theory
is to never add to a losing position. If this stock trades below $2.35, I
will immediately sell it. When using this technique it is important to keep
in mind that no matter what happens you have to be willing to cut your losses
as quickly as possible. Just because it worked 3 times in a row does not mean
that it will again. As often said by John Maynard Keynes “the markets
can remain irrational a lot longer than you and I can remain solvent.”
As I have written in the past, according to
Bernard Baruch, “to make a fortune in the stock market you only have to
be right half the time.” The key is when the market does not go your
way to cut your losses as quickly as possible and move on.
I feel that this is an important teaching
post because you will see in real life, at my expense, how my technique plays
out today.
Either way this will be a very interesting
day.
|
