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.

Don't forget to try out the Free Trend Analysis. It's FREE, so give it a shot!

TODAY'S BREAKOUTS & BREAKDOWNS

What a day! The VIX hits 40+, the Dow drops below 10,500 and then all of a sudden...a power rally! That was crazy! If you haven’t read my article on “How to Trade Breakouts and Breakdowns”, you should definitely do it.

Obviously, since the market is was up 4% today, I have a list probably over 100 breakouts, mostly concentrated in the financial sector. The medium and small-sized regional banks and financial services companies did the best. For example:

Frontier Financial (FTBK) up 50.3%! Today marks its official day out of mediocrity. Notice the 50-day MA curving up as well as the clean close well above the 200-day MA. There’s plenty of support for this bank in the future.

CoRUS Bankshares (CORS) spiked 45.5%! Unlike FTBK, CORS didn’t make it past the 200-day MA. The positive is that the stock didn’t drift lower after hitting resistance, but closed right at that level signaling a major willingness for buyers to break CORS above the 200-day MA. Note the ascending triangle as well as the 50-day MA curving up.

Pacific Capital (PCBC) reached its highest level this year…in only one day! Up 40.3% and clearly out of bear market territory, PCBC is free to head higher. Notice the upward wedge that formed as well as the most extended breakout above the 200-day MA of any chart profiled in this article.

Huntington (HBAN) should consolidate nicely right above the 200-day MA.

Newcastle (NCT) made an AMAZING comeback! Unbelievable. Provided that NCT doesn’t reverse to $6.50, it will go higher after some struggle at the 200-day MA.

Firstfed (FED) formed a downsloped flag, which set the stage for a breakout. FED will go higher.

Expect some consolidation for Marshall & IIsley (MI) and range-bound action for the next several weeks.

Banner (BANR) formed an ascending triangle and broke out up the upside, living up it the pattern’s description. The 200-day MA proved to be considerable resistance for BANR, having moved has high as $21, but falling below the MA to close at $17.51. If BANR breaks and closes above $19, it’s a buy.

A non-financial that broke out was Media General (MEG), up 111%! The company declined to comment on why the stock was up so much, but news suggests that MEG had the best August performance out of all of its competitors. Something is definitely in play here.

On a 400+ point day, you don’t expect too see many breakdowns. If a stock broke down on days like this, then that stock is totally in trouble.

Take, TETRA Technologies (TTI) as an example. TTI revised its guidance lower to $1.30 - $1.55 per share. That's always bad news.

A classic breakdown. Inevitable.

Dayton Superior (DSUP) posted weak ABI numbers and broke through a major multi-month support level. This means that ever buy at the $2 level since June either got crushed or sold in panic.

There was no way to see this one coming. Merck (MRK) discontinued a licensing agreement started in 2007 with SurModics (SRDX).

The Asian markets have been getting crushed more so than us in my opinion. AsiaInfo (ASIA), is no exception.

Apogee Enterprises (APOG) cut its 2009 outlook to $1.65 - $1.82 per share, down from $1.82 - $1.94 per share. Look at all the islands formed on the chart due to the gaps.