Friday, October 10, 2008

HOW TO TRADE POWER SPIKES

Today is one of my favorite days, not because it’s the end of the worst week in market history, but because the end-of-day rally created so many trading opportunities for next week (yes, can you believe it?). I’m talking about trading power spikes, one of my favorite patterns. A stock exhibiting a power spike is one that displays an immediate and forceful change in sentiment from the previous day. Whatever the reason, traders instantly changed their minds on the direction of the stock…a very powerful signal indeed.

There are basically two ways to trade spikes, but first, the strategy:

1) If a stock that spiked the previous day looks like it will gap up in today’s session, then the buying momentum is highly likely to be maintained throughout the day or allow you enough margin to set a stop in case of an intra-day sell off.

2) If a stock that spiked the previous day looks like it will gap down in today’s session, then the selling momentum is highly likely to be maintained throughout the day or allow you enough margin to set a stop in case of an intra-day rally.

Ever notice how sometimes a stock that spike can go on for 3-5 days straight, producing gains of 20, 40, 60% in a matter of a week? But, have you also noticed that a “spiker” could gap down and end the day down 20, 40, 60%? In most cases, not all, the consensus at the open will determine the day’s direction. I repeat, in most cases, not all. I will also add that, if done incorrectly, the losses can be devastating.

Take a look at VeraSun Energy Corp. (VSE). This is a stock I recently shorted using my method #2.

Guidelines:

1) How long do you hold a short? Until there’s a up day where the open and close cancels out the previous day’s open and close. This is a candle of equal or greater length than the previous day.

2) Add a stop. You never know what will happen.

3) For stocks exhibiting #1 where the stock continues to go up, up, and away, then there will be a day where it will form a bearish gap up, doji, or bearish engulfing pattern, all three of which are prominent reversal patterns. At that moment, if you miss the move up, you can short the move down. Also at this moment is for you longs to get the heck out. Don’t hang around when there aren’t any buyers left.

4) Spikers are unstable and many will fail. Stocks that rise too quickly in a very short period of time will reverse quickly and end up close to where they started.

5) Spikers will meet resistance and make a successful or failed tests just like regular patterns.

These trades typically yield an average of 15-30% per pop and the average holding period is 3-5 days. You can do the math and see why they’re one of my favorite patterns.

Here are 20 spikers to pay attention to on Monday and beyond (plenty to go around). Don’t forget, if any continue to the upside in force, short on the reversal day to capture the stock on the way down. Either way, you’ll make money regardless of what the market is doing.




















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2 comments:

Lee said...

John:

If u had to play 2 only, which ones would u like?

John C. Lee said...

I won't know that until Monday pre-market.