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 DISASTER! The Dow dropped 777.68 points or 6.98%, the Nasdaq dropped 199.61 points or 9.14%, and the S&P 500 dropped 106.59 points or 8.79%. Today was the Dow’s largest one-day drop, EVER. Oil dropped $10.52 or 10.1% to $96.36, but not before hitting $95.04 intra-day. Wachovia’s (WB) banking operations get bought out by Citigroup (C) and the stock lost about $19 billion in market cap in a single day. We continue to make financial history and every day is comparable to the most recent thriller/suspense movie you’ve seen.

What amazed me the most? It was the media coming out on Sunday night peddling this fluff that they called a “the deal that had been reached”. What I don’t understand is if a deal had been reached, why did it completely breakdown? If you were watching the House vote and watched the market intraday alongside, you could see how each update on the vote count actually moved the market considerably. There was a sight delay in my opinion and I was able to short when there were only about 50 or so votes left and the “nays” were well in the lead. At that point, whatever confidence I had in the financial media completely disappeared. The House is expected to present a new proposal on Thursday at the earliest, at least that’s what the media is saying…

On September 5, I wrote an article titled “The Rally is Over”. Several people made some stupid comments. Look at this comment:

“It's amazing that by just looking at charts one can predict the future and make bold statements such as "This Rally Is Over".

I wonder if there are other forces in life which could affect iron clad chart trends, and perhaps make "This Rally Is Over" sound a bit more uncertain. Nah. Wishful thinking on my end.”

Haha, whatever, I don’t have to prove anything. Never underestimate the power of technical analysis. The breakouts and breakdowns I profile daily are the biggest harbingers of a chart. They will give you clues as to where the stock will go.

Anyway, I searched for my usual breakouts and breakdowns and I found 5 breakouts, one of which was the VIX, which doesn’t really count. I was shocked with the breakouts, which I’ll talk about later in the article.

Thornburg Mortgage (TMA) gapped up 310.71% today, the largest gainer by far. However, look how the volume didn’t support price action. I can pretty much say for a fact that TMA will drop tomorrow. The board announced a one-for-ten reverse split, which is intended to boost the stock’s value above $1. TMA is also currently in negotiations with repurchase counterparties (who helped avoid TMA’s bankruptcy) and extended its tender offer for preferred stock. It’s still a $1 stock, and I would avoid it at any cost.

Delia*s (DLIA) agreed to sell its CCS brand for $102 million to Foot Locker (FL) and as a result, the stock jumped 17.2%. Not bad considering that everything else went down the toilet. How bad was it today? Out of all the industries, Alternative Fuels as a whole was the best performing sector with a 0% gain!

VeraSun Energy Corp. (VSE) spiked 81.8% today. There was no news out, at least to the public. VSE has started to fill its gap; however, I would the hell out of VSE if there is any size gap down at the open. Be warned: VSE may fill the gap intraday. Shorting spikers on no news is a great way to go.

Another stock that spiked on no apparent news is Raser Technologies (RZ). Looks like a major short squeeze to me. 24% of the float is short (or was). Any gap down warrants a short at the open.

The VIX is the last “breakout” to profile. In my weekly technical commentary that is distributed early Monday, I wrote that the VIX was forming a high-and-tight flag and that a breakout was imminent. I had no idea it would be today. At this level, the VIX will hit the 50 level. I would also like to point out that a flag or any type of consolidation pattern was never formed on the VIX for at least the last 3 years, so I knew it was something special. People are scared, and the bull camp is getting smaller and smaller each day. Expect these fear levels to remain elevated for a while.

As for the breakdowns, I found over 300 of them. If I tried to profile all of them here, the article would be almost 700 pages long. That’s how bad of a day it was.

Here are some of the biggest losers. I declined to draw trend lines because I thought they were obvious and pointless. Many of these no longer have any support levels remaining. I warn you NOT to go long in any of the following:

Once again, NO long positions, please! I don’t care if you think that the stocks are “cheap”. Trust me, they’ll get even cheaper (you might even get a 50% discount tomorrow!). If you don’t know how to short, just stay in cash. Standing aside is also considered a position.

On the top 100 largest declines for both the NYSE and the Nasdaq, all 200 of them declined by 17% or more. I highly recommend that no long positions be entered in any of them.

Today, there were 1,142 new lows hit and only 23 new highs made. The market cannot rally with these kinds of numbers being hit.

The rally has been over, and I can confirm that we officially began the third primary leg of this bear market. Don’t ignore chart patterns; they’re trying to tell you something!

Fair warning to longs: we have a lot more new lows to hit.