Early Morning &
Momentum Stock Trading

What You Need To Know About ...

S&P Futures Before The Market

If they are down before the market opens, then there is a better than average chance the market will open down. It might go up soon after the open, but it will probably open down. If the S&P's are looking up before the open then the market will probably open up. It might not stay up, but it will probably open up.

If you are a ROOKIE and any of the following Indicators are WEAK or DOWN at the open - DOW - NASDAQ - S&P Futures - sit back and watch - there's always tomorrow! If all three are weak or down at the same time don't even think about trading!!

S & P - Fair Value

Many people ask the significance of the S & P futures and it's relation to "fair value" before the market opens. Here's a link which explains...

http://www.programtrading.com/fvalue.htm

Why Is The Stock Moving?

Many times you will see a stock up 2 or 3 dollars from yesterday’s close and without any word of news about why it may be moving. These are often very interesting stocks to take note of because "something" is happening and it warrants further investigation. (inside buys, news leaks, new contracts, rumors of mergers, all kinds of interesting things could be causing the move).

The reason PCLN, EBAY & YHOO were up today while the others in the same sector were down is the SHORT SELLERS were covering by BUYING those 3 stocks! For those who are ROOKIES and have a hard time understanding this - call our office tomorrow and we will try to explain.

Buy On Strength & Sell On Strength

Always sell too soon, and stay ahead of the pack. Try to predict what the market will do and move in advance of it. Don't hang around waiting to sell at the top. Your chances of selling at the top (or buying at the bottom) are remote. If you can get close to the top and bottom you're doing well. Buy to strength & sell to strength!

Sympathy Plays

Often you will see stocks get hit in "sympathy" with an earnings release. For instance BMCS dumped Thursday, October 21st, 1999 in sympathy with IBM, yet BMCS did nothing wrong, they are simply lumped in the mix. Often these become great buying opportunities. Same thing with SUNW.  They were downgraded the same day because IBM said they were having Y2K problems. Did SUNW say they were having problems?? No.

Buying Imbalance

If you see a buying imbalance it means there are more buyers than stock.

Trading In Fast Moving Markets!

The price of some stocks, especially recent "hot" IPOs and high tech stocks, can soar and drop suddenly. In these fast markets - when many investors want to trade at the same time and prices change quickly, delays can develop across the board. Executions and confirmations slow down, while reports of prices lag behind actual prices. In these markets, investors can suffer unexpected losses very quickly.

Investors trading over the Internet or online, who are used to instant access to their accounts and near instantaneous executions of their trades, especially need to understand how they can protect themselves in fast moving markets.

You can limit your losses in fast moving markets if you... know what you are buying and the risks of your investment; and know how trading changes during fast markets and take additional steps to guard against the typical problems investors face in these markets.

A lot of times, a stock will move directly opposite as expected on news releases. When this happens, it's a sign the news has already been absorbed by the market.

In the chaotic world of trading, there is no room for hope. Trading is different than running a business. In the world of business, it is ok, in fact it is encouraged, that one operates with the "hope" of being successful.

However, in trading, it is imperative that one doesn't operate with any "hope", "wish" etc.....in order to keep a focused mind.

You can't hope to be profitable. You must be profitable. Think professionally. In trading, professionals do not hope. Mental stops are used so one doesn't reveal their hand to the opponent. You must have the discipline to take your stop. Another important reason mental stops are used is because not everyone will use a Mental stop, most in fact use physical stops, therefore, the MM's will take the market to these accumulations of stops. One must have the ability to monitor price and volume action so they can gauge whether the move is real or manipulated in order to nail those stops.

Discipline is key.

In or Out?

If you wouldn't get into the trade now, get out. Your current position in a day trade should not effect the entry/exit decision. Protect your capital.

Stay Ahead Of The Pack

Always sell too soon, and stay ahead of the pack. Try to predict what the market will do and move in advance of it. Don't hang around waiting to sell at the top. Your chances of selling at the top (or buying at the bottom) are remote. If you can get close to the top and bottom you're doing well.

Late Day Momentum

Late day momentum in either a particular stock or the over-all market typically carries over into the first part of the next day. Any time a stock rallies on the close, look for a strong open the next day. The same is true for the over-all market. When new information about a company spreads and causes a strong increase in buying (or selling) in a particular stock and the buying (or selling) HAS to stop because the market closes it creates an even stronger demand (or supply) for the stock the next morning.

This happens because:

1. All the current buyers didn't get enough stock and still have open buy orders.

2. The traders who gravitate to moving stocks will see where the stock closed, and by looking at an intraday chart, they will see that it closed up strong so they will jump in the next morning . Now you have 2 groups of buyers adding momentum, which creates the carry-over of upside momentum the next day. The same is true for the market as a whole - when it closes strong, it usually opens higher the next morning.

If a stock was going down sharply at the close you would see it open down sharply the next morning for the same reasons. You can make a quick profit by taking advantage of this scenario.

Rising Bids

If people seem to be lining up to buy a stock--as shown by rising bids for larger share blocks--that's a sign the price may rise short-term.

The Standards & Poors Index (S&P)

Market Direction to get the best "feel" for how the market will open watch the S&P futures before the market opens. You can see the S&P futures in the lower right hand corner of the TV when you're watching CNBC. Checking the S&P's before the market opens is only a guide of how the market will open and the market could go in any direction after it opens. Check this number for the opening direction only.

Why?

Because if you're long on a stock over-night, on a trade you're in for 1-3 days for example, selling the position "market on open" can get you the highest price of the morning. Especially on the Nasdaq stocks. When the market looks like it's going to open strong, a lot of stocks "gap" open, then come down within 30 minutes to 1 hour of the open. So sell into strength.

By the same token, do not enter your buy orders "market on open" when the S&P futures are up before the open because you'll end up paying too high of a price by competing with the crowd. If you're looking to buy, sometimes it's best to wait 30 minutes or so after the open because usually by then, the froth has worn off the market and things have settled down a little.

Technique In A Mixed Market

A technique that we like to use when the market isn't sure what it wants to do.

How many times have you seen the market open up strongly, then sell off, and finally settle into a "rut" where there doesn't seem to be any clear direction? Probably too often, and the question becomes what do you do? Here are a few suggestions. Naturally we want to find the strongest sector of the day, but sometimes it isn't even clear if there is a strong sector! So what we like to do is wait. It is very rare that a sector or a stock won't take a leadership role sometime during the day. Even with the "10 AM" rule pounded into your head, sometimes it still isn't really clear who is leading the day even by 10. When faced with a day like that it is often best to wait until the next "key" time of the day, and that is about 11:00 AM. We have found that if no one stock or sector wants to take the lead early on they usually will as you approach the 11 am (eastern) hour.

We stress the 10 am rule as a good benchmark to follow where you can most often find a good trade. By this we mean that you wait out the first 30 minutes of the market and let it do its shaking and twisting. What will usually happen is that a good stock in a strong sector will gap up a bit, then pull back and then power ahead. This is just a guideline though as we have seen many "false starts". When the market doesn't have a leader, or the stock that you are focusing on does what it is supposed to early on, but then fades out again, the next big focus time seems to come around 10:45. By this time if the market is going to be flat to up a bit, someone is generally leading the pack and hopefully this is the stock you are watching!

Now if the pattern of the day has really been one of totally non directional, then it is often best to wait until the very last hour of the market. When we get a day where even at 1PM the DOW has crossed the unchanged line 3 or 4 times, and the NASDAQ has been either static or wandering around also, the last hour of the day often decides where things are really going to go. To get the best chance of a late day profit, write down the stocks that tried to run during the first hour of the market,they often end up being the ones that finally power up late in the day.

So remember, sometimes we have to be patient to enter a trade. Some days the market is simply too undecided for us to be sure of a good entry point. But it is almost a given that at one point either a sector, or an individual stock will make a run for it and that is the stock you want to be in!

Price of Stocks Can Soar and Drop Suddenly

The price of some stocks, especially recent "hot" IPOs and high tech stocks, can soar and drop suddenly. In these fast markets when many investors want to trade at the same time and prices change quickly, delays can develop across the board. Executions and confirmations slow down, while reports of prices lag behind actual prices. In these markets, investors can suffer unexpected losses very quickly. Investors trading over the Internet or online, who are used to instant access to their accounts and near instantaneous executions of their trades, especially need to understand how they can protect themselves in fast moving markets. You can limit your losses in fast moving markets if you know what you are buying and the risks of your investment; and know how trading changes during fast markets and take additional steps to guard against the typical problems investors face in these markets.

Accumulation

ACCUMULATION: Buying over a period of time, to avoid making a single, substantial purchase that might drive up the market price. Or more generally, any buying.

Distribution

DISTRIBUTION: The sale of a large amount of stock by a single entity over a period of time rather than all at once, to avoid adversely affecting its market price.

Limit Your Loses In Fast Moving Markets

Investors trading over the Internet or on-line, who are used to instant access to their accounts and near instantaneous executions of their trades, especially need to understand how they can protect themselves in fast moving markets. You can limit your losses in fast moving markets if you know what you are buying and the risks of your investment; and know how trading changes during fast markets and take additional steps to guard against the typical problems investors face in these markets.

Rebounds

Often after a big rebound bounce we start off with a bang again the next day but it fades as everyone "looks around" to see who may be selling into the strength. Then once the "coast is clear"
they feel brave enough to rush in again and buy.

Morning Momentum

Just about every morning you will see a couple dozen stocks that are opening much higher than they closed the day before (gapping up) and history shows us that in general that gap won't hold up and they will weaken.

Then, if they are strong, they will firm up again and start rising. The idea is to wait for that morning crazyness to pass and if they get back to that "gap high" of the morning , chances are they will keep going for a nice gain. This can happen anytime of the day. Suppose the ABC company opens at 105 after it closed at 100 yesterday.

Chances are that sometime during the morning it will pull back and let's say that it pulls back to 103. Well, what we do is take a note of that first gap price which in this case was 105. If any time during the day it manages to tick past it (even by an 1/8th) it is probably a buy signal and it will keep going for a while. Often all that action takes place in the first half hour
of trading, but the fact is that "gap outs" can occur at any time during the day.

Why does it work so well? Because that morning gap price is actually a very short term resistance level and if the stock happens to creep up above it, it is literally breaking out through resistance and everybody loves a breakout! At the open take a note of some of the opening highs of the day in your favorite stocks. Then after the initial crazyness is over watch them to see if they are creeping back up to the initial gap up price. You will be surprised to watch that as they get just above it they often get a very quick little "pop" and gain a few fast points. This tactic can be used for both day trading and for entry points on short term holds.

Fast Sell Off

One thing that has always served well after a giant sell off is looking at the stocks that ran back up the fastest. Obviously money came back into them quickly and although they may pause a bit, first money is often wisest money.

Two Groups Of Buyers

The traders that gravitate to moving stocks will see where the stock closed, and by looking at an intraday chart, they will see that it closed up strong so they will jump in the next morning . Now you have 2 groups of buyers adding momentum, which creates the carry-over of upside momentum the next day. The same is true for the market as a whole - when it closes strong, it usually opens higher the next morning.

If a stock was going down sharply at the close you would see it open down sharply the next morning for the same reasons. You can make a quick profits by taking advantage of this scenario.

What To Do If A Stock Drops On You

Let's say you buy a stock and it drops on you. No matter how astute you are and how good the stock looks, the unexpected can happen. You are mad because a lot of your capital is tied up in the stock. You see other trades moving where you could be making money, but you are stuck. Do you sell? Yes, you could (and maybe you should-have sell rules and stick with them - 8% to 10% on stock buys), but you did not stick with your sell rules and if you sell your account will be decimated. If the stock is optionable (it has to be or this won't work), you can start the covered call game just like we do with our long term holds. Study the stock's pattern. Get to know support and resistance, what is unusual volume, when earnings are reported, etc. Then start selling calls when the stock hits resistance or a top and starts to come down and buying them back when it turns back up.

You have to work it hard or it can take forever. What you are doing is lowering your cost basis in the stock by taking in cash on the net credit after selling and buying back the calls. Eventually you can build up enough cash to the point where you can go ahead and let the stock get called away and your account won't be in total shambles.

The best alternative is to avoid this situation.

If a stock starts to fall after you buy it and it loses 8% of its value from where you bought it, sell. If a stock you want to keep but sold calls on starts to rise, close the position fast. Don't get yourself into a position of hoping the stock will fall or having to really work the buying and selling of calls.

We love to work the call selling and buying when we are ahead and not underwater - that is fun because it is extra money.  If you are underwater, it is like trying to work off debt. All that hard work just to hang on.

If the stock keeps rising on you, it gets even tougher.   Better to nip it in the bud because believe me, if you do this long enough, the unexpected will happen.