Market Analysis and Trading Plan, March 3.

An Excerpt from the Timely Trades Letter.
The market broke above the tight basing pattern, noted in the last Letter, during Monday’s session. The move came on above average, and increasing, volume. On Tuesday the market continued moving up, once again on increasing volume. During Wednesday’s session the market was down fractionally on declining volume.
The trading plan was to sit tight until the market broke out of the tight basing area, and then trade in the direction of the break. This resulted in looking for a few long positions on Monday and Tuesday, and there were plenty to choose from. A number of the setups from the last Letter triggered and made strong and profitable moves in just a few days. PCLN moved up sixteen dollars, CMG was up five dollars, NEWP moves up 4.55, OIIM up 48$, PIR up 6.7%, CPO up 3.7%, JLL up 3.&%, CMI up 5% and LZB up 13%.
Since I was only looking to add a few long positions I prioritized the opportunities by looking at the risk in each trade, as measured by the distance between my entry point and the placement of the initial stop loss. I also look at the potential reward, as measured by the distance between my potential entry point and the next resistance area. Trading is about managing risk, so when there are multiple opportunities I pick the trades that present the best potential reward with the least risk.
When there are a large number of triggers from the setups shown in the Letter I often get an email from a trader that either has, or wants to, take them all. They get excited when things start moving, and want to jump into the market. Trading is not about feelings or hopes or desires, it is about analyzing the market, developing a plan, and then trading well tested systems. The market analysis called for taking just a few new long positions on a break above the tight basing area noted in the last Letter. The reason for just wanting to ‘test the waters’ with a few longs is that the market is close to resistance from the upper Bollinger Band, and also horizontal resistance from the recent highs. The market tends to base or retrace as it approaches resistance, so I did not want to be loaded up on longs in case the market follows the normal action upon reaching resistance. If the market breaks above the recent highs on strong volume, then it will have proven itself and I will be using more trading positions. Any move worth trading does not require you to be ‘all in’ on the first day or two. The idea is to take a couple of ‘feeler positions’ and then add to them if the move is confirmed. Trading fewer positions and using small position sizes gives me some profit potential if the market continues up, and it protects previous profits in case any rally stalls around previous highs.
If the market continues up I will continue trading a few longs, and will take profits on them if the market becomes extended above the upper Bollinger Band, or approaches the recent highs in the 2335 area. Since the market is close to resistance this is not a time to be loading up on longs, just focusing on a few positions that present favorable risk/reward ratio’s as noted above. If the market had more ‘room to run’ before reaching resistance I would be using more trading positions.
The markets price pattern tells us whether to focus on longs, shorts, or cash; and the volume pattern tells us how aggressive to be. The continuation of the bounce off the 02/05 hammer pattern indicates that trading longs is interesting, but the risks of a retracement increase as the market approaches resistance. The close proximity of the market to resistance from the upper Bollinger Band and the recent highs in the 2025 area indicates that risks have increased, and we should only be looking at trading a few longs.
If the market hits the upper band, or gets close to the recent highs, I will be taking profits on long positions; which is the normal practice in a trading range market environment. If the market pulls back below the 2265 area, I will take profits on long positions that are not moving up on increasing volume, or showing accumulation patterns.
Short positions would be interesting if the market approaches the recent highs on declining volume, and then pulls back on strong volume. Aggressive traders might consider a few short positions on a strong volume pullback below the 2260 area, and add a couple more more if a strong volume pullback continued below the 2225 area. I will avoid new short positions on a light volume pullback.
There are no risk free trades. I want to manage risk by looking at each setup and asking, ‘what is the lowest risk way to enter this trade?’ I then want to compare that risk to what my other choices are. I am not focused on one stock, I am looking to manage units of risk by looking at all available trades, the various entry techniques, and the potential risk to reward that each trade yields. I then take the best of what is available, within the constraints of the trading plan. I do not focus on watching for triggers to within the penny. I am looking at all the potential trades and then picking the ones that are best. All trading involves risk, there are no sure bets.
Steve Palmquist a full time trader who invests his own money in the market every day. He has shared trading techniques and systems at seminars across the country; presented at the Traders Expo, and published articles in Stocks & Commodities, Traders-Journal, The Opening Bell, and Working Money. Steve is the author of, “Money-Making Candlestick Patterns, Backtested for Proven Results’, in which he shares backtesting research on popular candlestick patterns and shows what actually works, and what does not. Steve is the publisher of the, ‘Timely Trades Letter’ in which he shares his market analysis and specific trading setups for stocks and ETFs. To receive a sample of the ‘Timely Trades Letter’ send an email to Steve’s provides additional trading information and market adaptive trading techniques. Steve teaches a weekly web seminar on specific trading techniques and market analysis through Power Trader Tools.
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