September 22, 2006
Print this page
|
September 22, 2006 |
|
Good Morning all; Some more thoughts on risk-reward: As I left off yesterday, the reward-to-risk number comes from our entry, stop and target prices. What I want to emphasize here is the order this happens. When you are about to enter a play, you are following an exact strategy. That strategy should have a designated area for the entry, stop and target. For example, using a Pristine Buy Setup, you may have an entry over the prior bar's high (we know this number to the penny), with a stop under the prior bars low (we know this number to the penny). You may choose to add on some pennies if you choose, but you will still have exact numbers to be using. We have a target of the prior pivot high in the trend, which is at least one target, and we know that number to the penny. If you have several targets, take the average of all of them to use for the 'reward'. Now here is how it must work. Calculate the average target minus the entry. This is the reward. Calculate the entry minus the stop, this is the risk. Divide the reward by the risk, and this is your reward to risk number. If this number is unacceptable to you, then you must pass the trade. We will discuss Monday what 'acceptable' numbers might be. While this seems easy, here are some common variations that are NOT acceptable to me. Taking a target estimate and dividing by three to use as yours stop. Taking your stop and multiplying by three to get your target. Using a percentage gain and loss as your target and/or stop. All of these ignore the chart and lower your odds of success. The Market: If you have been reading this Core Trader it should not be a surprise to you that the market gapped up and traded to a new high, then, as CNBC was literally cheering the market on and talking about the DOW's new all time high, the market sold off something fierce. As most of you probably know, during the day I run the Pristine Method™ Trading Room (PMTR), where we focus on all types of trades including day trades. As the market went to new highs we had almost all short trades yesterday. One of the tell-tale signs of the markets weakness was the semi-conductor index failing to participate. It led the market down. So the DOW is at new all time highs, is it? Does your account feel like it is at new all-time highs? Does the average tech stock feel like it is at all time highs? If you still have your 1999 portfolio, would you be at your greatest gains? It is funny how the U.S. uses the DOW as its benchmark, while it really has little to do with what is really going on out there. |
Chart courtesy of Mastertrader.com |
Here was a big clue today. The market started for new highs, but the Semiconductors, shown here by the SMH trust, already made a lower high on the hourly chart, at minor resistance, and at about a 50% retracement. They continued that move by falling all day today. At '1' we had a tell-tale sign, a big topping tail. At '2' we have our first lower high on a pivot basis. We then make a serious lower low at '3' trading below significant support. The 50% retracement back to minor resistance at '4' led the way to today's fall. If the hourly chart of the QQQQ and SPY do the same Monday, we will then take a look at the daily support levels and as those break, we will look at that list of weak stocks I have posted below to short. So where do we go from here? We looked yesterday at the weekly resistance and the over bought weekly to get here. The weekly chart is in an uptrend so we are not looking to see if we can 'short' the weekly chart. However even a buyable pullback on the weekly, which could last 4-7 weeks or more, may turn into a daily downtrend and certainly an hourly downtrend. So the first step is to see when this sell-off damages the hourly charts. That has already happened. The next step is to see when the same happens to the daily chart. In the PMTR we initiated some swing shorts only because they were day trades that closed well in the money. Just so you know where my day to day thinking is. The play on NUAN is now cancelled. As time goes on we see that it is perhaps not 'weak' but rather just on its own, and moving up at the moment. We lost our tight stop and our relative weakness edge. GLT is tempting, as is MDG and RES but I do not like the risk rewards. I am going to tip my hat to ARRS. Though I am concerned about the amount it retraced after the gap down on the daily (-WRB on weekly), it has hit a wall here and will carry a nice risk to reward. |
Chart courtesy of Mastertrader.com |
Sell short ARRS under $11.15 with a protective stop over $12.15. We will look for a move to the $3.00 and $6.00 for two targets. Here are the open plays and any updates from the prior author, Peter Kaplan. |
Chart courtesy of Mastertrader.com |
Open plays management changes - NONE Here are my watchlists for this week. Green is a bullish watch, red is a bearish watch. These are just watchlists. |
Chart courtesy of Mastertrader.com |
Here is a watchlist for possible plays. This is the 'nibble' watchlists, as some aggressive traders may look to play these with a lower risk amount or start a small position with a wider stop (i.e. - 'nibble'.) These are not official recommendations for one reason or another. The reasons plays may be on this watchlist but not good enough for a full risk official play will be discussed in upcoming Core Traders. |
Chart courtesy of Mastertrader.com |
There are no current open plays from my recommendations. That wraps it up for today, good trading all. |
|