Sunday, March 18, 2007

Q&A


Topics:

  • Gap Fill or How we might trade (NASDAQ:LEND) on Monday
  • Momo Stock Watchlist
  • Timeframes and Moving Averages

Q. Further to my previous post, a reader asks me to explain "Gap Fill" in the context of (NASDAQ:LEND).


A. The first chart below explains the gap fill area of interest marked in red. A good portion of the gap from Thursday's closing price to Friday's opening price has been filled already. The key take away from the gap fill is that it lines up perfectly with pivot point support (blue arrows), and falls in between the the 38% and 50% Fibonacci retracement of the last leg up (from Tuesday's low to Friday's OR high).

What does all of this mean? Well, on a normal retracement, we fall into pivot point support, which could initiate a reversal back up. The only caveat here is the convergence of all of the moving averages (MAs). This could slow down the reversal process as we don't want the MAs hovering above price on a long entry. Last Thursday we only had to contend with the 5 MA, but now we will have the 50 and 200 in play as well.

The second chart highlights the short-term target ($14.75) of a reversal back up. The three red arrows served as support on the way down and will be resistance on the way back up, . This is the maximum we can expect (notwithstanding a major news item) and there will be pockets of resistance such as Friday's high, in between.

A gap down below the pivot point zone $9.30-9.40 invalidates the setup. It's almost impossible to find shares to short at this point, so if support doesn't hold, just move on to something else. I'll also mention for newbie traders that you do not want to buy unless a clear reversal pattern presents itself.


Click on charts to enlarge


Q. Another reader asks me to list some of the key stocks by sector that I monitor in pre-market.

A. In general I prefer highly liquid stocks (volume > 1 million shares per day) with an average daily range > 1 as measured by the ATR (average true range) . The following is my current momo watchlist of stocks by sector. I don't often trade oil and gold, except when they show up on the gapper scans, so they might be conspicuous in their absence from the list but that is intentional.

Sector

Stocks

Semiconductors

LRCX, NVDA, SNDK, VSEA, FSLR, BRCM, KLAC

Networking

QCOM, JCOM, RVBD

Biotech

AMGN, CEPH, CELG, GILD, AFFX

Communications

RIMM, GRMN

Internet

AKAM, AMZN, BIDU, WEBX

Media & Advertising

FMCN, VCLK

Energy

ENER, STP

Industrial

JOYG

Metals & Materials

EXP, TIE, X, STLD

Airlines

CAL

Financial

GS, LEH, ICE, MA, NYX, NMX, LEND, FMT

Food & Beverage

HANS, WFMI

Retail

GES, URBN

Software

ADSK, CTXS, CKFR, CTSH, ERTS

Hardware

AAPL

Pharmaceuticals

AMLN

Q. A reader asks me to discuss my favorite timeframes and what moving averages I use.

A. For intraday trading I prefer the 15 minute timeframe because it is not too fast and not too slow and allows me to assess the setup in a meaningful way. For highly liquid and orderly stocks, I also like to use the 5 minute timeframe. For example, if the 15 minute view has triggered an entry, I will often use the 5 minute chart to time the entry.

For my nightly review of stocks, I mainly focus on the daily chart and sometimes the 60 minute timeframe.

I used to use the 10 period EMA as my main MA for support and resistance on the 5 and 15 minute timeframes, but after following Trader-X, I realized that his use of the 5 period EMA was much more precise for timing the entry on gap dummy setups. I still use the 10 period EMA for the daily timeframe. The other two most important MAs for me are the 50 and 200 because these are industry standards, ie. everybody is watching them. For the 50 and the 200, I use the SMA because they are farther away and I don't need the smoothing effect of the EMA.

I use the MAs for timing entries, support/resistance, as well as crossover and convergence, the latter two of which can alert me of an upcoming move.

9 comments:

Trader-X said...

Nice explanation.

Jamie said...

Thanks X.

Ragin' Cajun said...

Great Stuff, I added a link to this post on my site.

Vtomer said...

Jamie, Thanks

I wonder though what the emotion of the market will be after the news of case against Lend. Anyways, thanks for the advice and help.

Cheer
Vivek

Flatwallet said...

jamie,

You are now approaching publishing status levels. So when is the book scheduled to be out?

LP

Jamie said...

Thanks for the link RC.

Thanks for the compliment LP.

Vivek, I'm not aware of any new news on LEND over the weekend. Everything from last week is priced in already. However, there seems to be news in the sub-prime group everyday. So it is important to be aware of the latest information. This setup is not recommended as an investment, but rather a daytrade. I do not recommend that anyone hold shares overnight. This is high risk. If it does not suit your risk tolerance level, you should consider other, safer stocks and sectors.

Good Trading!

Vtomer said...

http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070316005810&newsLang=en

This came out I believe at the end of the trading day.

Thanks
Vivek

Jamie said...

Thanks for the link Vivek,

That news will not affect my trading plan for LEND. LEND is widely regarded as the most conservative of the sub-prime lenders and if the market doesn't like the news it will be priced in by the time I take a trade. My only real concern about trading a high risk stock like LEND is news that is released intraday. I don't want to stuck in a trade if the stock gets halted.

As I stated in this post, if LEND gaps down below the pivot point zone of $9.30-9.40, the setup is invalidated.

Also, I don't trade with money that I can't afford to lose.

Cheers!

Vtomer said...

Thanks Jamie,

I get the hint.

have a good day tomorrow.

Vivek