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Sam Rhodes is a HotScans user from Thayer,
Missouri who day trades with his friend Billie Jean. They are
full-time traders who have developed a successful team approach:
Billie’s job is to monitor the HotScans chat room, place trades
through Noble Trading, and evaluate signals on Wizetrade. Sam,
working at a separate computer, monitors the stocks they are
watching on a Datek streamer, watches a Level II, keeps an eye on
HotScans, and listens in on the Pitstock chat room where all the
latest news from the Dow Jones Wire is posted. Running in the
background is CNBC on a TV. Sam finds the stocks on HotScans which
are then confirmed by Billie Jean on the Wizetrade platform. If they
are in agreement, they take the trade. Sam says: “ We usually have
profit goals set before we enter a trade. We have found that if one
has no idea on an exit point, profits can evaporate quickly.” In the
following article, Sam tells traders how to avoid getting caught in
a flush move.
The Flush Move is a simple tactic used by market makers
to scare the hell out of traders. Market makers drop the price of a
stock by 5% - 10% in a quick and decisive move by simply pulling their bids
and selling to the remaining bids to a pre-planned point. One would think this
would cost a lot of money, but it costs very little. A market maker
may only have to sell 5,000 shares to drop a $10 stock by 50 cents.
This does 2 things, it takes out the traders stops and it creates
panic selling. If a trader is upside down on a stock or sideways
with a limit stop order it will guarantee a loss. It allows market
makers to buy the stock at a much lower price when the panic sets in
and traders start dumping. The same market makers who created the
panic are now buying your shares back at a lower price and laughing all the way to
the bank.
Trading rules are all to the benefit of market
makers. Just because they show an order to buy at a certain price
DOES NOT mean they have to exercise that buy. There is only one way
to make a market maker take your shares and that is to use the SOES
[ECN] route which is very expensive. Market makers even get around
that by just showing an order for 100 shares. If they are a SOES
market maker, then their obligation is only for 100 shares. They
might show an order for 100 shares and keep reloading their order
and buy 100,000 shares, but their obligation is only for 100
shares.
Traders see the flush and immediately want to short
the stock. This is perfect for market makers who are buying all the
stock traders wants to sell short. Market makers know they can
inflict more pain and losses when these same traders start covering
their shorts because the stock has reversed.
If you see a
flush move, watch how all the market makers pull their order on the
bid and let the stock die. I was involved with three such moves last
week. IDEV was trading at $6.00 and was flushed to $5.35 in 3
minutes and then quickly rebounded to $5.90 in the next 10
minutes.
HotScans can save you from these rotten tricks. By
using large volume for a 5-minute period, these flush moves will not
show up on HotScans. Remember, it takes very few shares to drop a
stock. Conversely, if you see a stock dying on heavy volume (at
least more than 400% volume) it’s a safe bet this stock is headed
down. Time your entry to short at any bounce in price, especially if
volume is increasing. Watch out for the Flush.
HotScans
users are about to get a real treat, the release of an upgrade
featuring trading strategies based upon the opening range and gaps.
This particular upgrade has been in the works for quite a while and
is currently being beta tested by several HotScans users. For those
of you who are experienced traders, you already know how valuable
this upgrade will be; those of you newer to trading, playing the
opening range is arguably the favorite strategy of the professional
trader. Not only are these trades taken at the open, they allow the
trader to evaluate a stock throughout the trading day. In other
words, professionals consider it critically important to know “where
a stock is” in relation to its opening range, at any time throughout
the day. This is relatively simple, if you follow only one or two
stocks, but has been virtually impossible to apply to the universe
of NASDAQ and listed stocks, as they cycle up and down during the
day. HotScans has solved this problem with this upgrade which uses a
series of icons displaying a stock’s position in relation to its
opening range, at all times. This new software is a milestone in
trading and significantly increases the traders arsenal of trading
tools.
In addition
to the advanced filters so familiar to HotScans users, many new
choices appear in the setup. HotScans is aware that inexperienced
traders might not know where to begin in regard to selecting from
the potential combination of trading scans. In order to facilitate
ease of use, HotScans is also releasing a group of pre-set scans
which will make the whole process of using this particular module a
relatively simple procedure.
Some
of the new HotScans features include:
-
Filter
for stocks with gaps
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Filter
for stocks
as they are breaking out of their opening
range
-
Filter
for stocks based on the price and volume action of their opening
range
-
Filter
for stocks trading above, below, or within their opening
range
-
Filter
for stocks trading at new highs or lows for the
day
-
New
display pop-up tags showing the actual volume behind all the
volume gauges
HotScans has been developed as a series of discreet software
programs. The first module, or program was Hot Stocks, released to
the trading community this past February. In addition to regular
technical upgrades, HotScans recently released MarketGauge Select,
allowing the trader to focus only on the best day-trading stocks.
The Opening Range and Gaps is the third in a series of upgrades that
has already made HotScans one of the favorite programs of
professional day traders. HotScans users can expect to receive this
upgrade within the first two weeks of July. HotScans
will continue this series of upgrades to this powerful software.
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Using Support & Resistance to Your Advantage
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HotScans is
great at finding stocks that are moving, but how do you know
when the move is almost over? One of the most common questions
I get is some form of: "How can I prevent going long at the
top of the move?"
We all know
the market doesn’t tell you when it’s almost done going up.
This problem is especially magnified for the day trader
because intraday trends can shift very quickly. There are,
however, lots of ways to assess the likelihood that a stock
will or will not move beyond certain price levels. The most
basic and insightful of such methods of predicting price
movement is the art of reading charts. For all of you who
believe that reading charts is too complicated or useless,
this article is for you; so don’t stop reading yet. This will
be a quick description of all you need to know to make looking
at a chart worth your while. Forget about all the "indicator"
stuff you’ve seen or heard about; this is just about supply
and demand. In this article, my reference to a chart will mean
either a candlestick chart or a standard bar chart. Both work
the same way.
How many
times have you thought to yourself that you would buy a stock
if it ever came down to a certain price because you had
noticed that the stock tends to bottom around that price. Or
in the case of taking profits, you may have planned on selling
a stock if it were to rise to a certain price because that’s
how high it got last time. Well you’re not alone in
your thinking, and by looking at charts you can see what
others are thinking. Here is how it works.
Most people
would agree that a chart makes it easy to see what the trend
of a stock is. If the chart is going up then the trend is up.
Simple. In addition to the trend of a stock it is also quite
easy to identify prices at which the stock is likely to stop
going down or stop going up. These prices are called Support
and Resistance. If you do nothing more with charts than use
them to identify areas (prices) that will act as support and
resistance you will be getting 90% of the value of a chart. So
don’t worry about all the indicators, just learn how to
identify support and resistance.
Support is
the technical analysts’ term for a price level at which the
stock is likely to stop going down. You can remember this by
thinking of support as something holding the market up or a
price level that will hold the market up. Resistance is the
technical analysts’ term to describe the opposite condition of
support. Resistance is a price level that holds the stock
price down.
Your next
question should be: "How do I find these areas of support and
resistance on a chart?" There are many patterns that indicate
support and resistance, but focusing on the basics is enough
to get started. Identifying major areas of support and
resistance is as simple as looking at the chart and finding
the prices at which the market stopped going up (previous
highs) and stopped going down (previous lows). That’s it. So
you are looking for recent highs and lows. If there is a price
at which there are numerous highs and then the stock sold off
then that area would be considered resistance. The more highs
that make up the resistance area the stronger the resistance
is likely to be. If the highs were put in recently then they
are likely to be stronger resistance than the highs created in
the distant past. Looking for support works the same way,
except you are looking for lows.
If the
chart does not have any obvious areas of support and or
resistance then don’t try to find something that doesn’t
exist! One of the biggest mistakes new technical traders make
is that they try to explain every wiggle of a stock's price
with the chart. The best use of charts is to focus on the
charts that have obvious patterns rather than trying to
interpret patterns that are not clear. Also keep in mind that
while highs and lows on a chart are specific points, it is
best to view support or resistance as an area around those
points. Here are two examples where I’ve highlighted the areas
of support and resistance with the dotted lines. Notice in the
Microsoft chart that in the beginning of June,
MSFT traded below the $24 level that had been support 3
times before, but then it snapped right back up. This strong
bullish reaction to the breaking below $24 area was a clear
indication that while it may have broken $24 there was
still plenty of support in the area!
Both of the
examples I have shown are daily charts. The analysis of
support and resistance applies to charts in any time frame.
But the daily charts are where I would focus if you are new to
charting. The daily chart also usually holds the answer to the
question posed at the beginning of this article - "How do I
know when the stocks move is almost over?" The answer is
still: " You can’t always know but you can spot the dangerous
situations." Knowing where the major areas of support and
resistance are on the daily chart before you buy a stock can
prevent you from buying a stock right below a major resistance
area! This is exactly what happened to a HotScans user who
asked how he might have avoided buying the hot stock UBET
right before it topped out on 6/20/03. As you can see by the
intraday chart of UBET in Figure A, the intraday chart this
stock had a huge run up in the morning from around $3 to
$3.54. If you had taken a quick look at the daily chart on
UBET (see Figure B) you would have seen that there was lots of
resistance in the $3.50 range and higher. I have indicated the
major areas of support and resistance with the dotted black
lines, and the red arrow indicates the day I am discussing
(6/20/03). Based on such strong resistance, it was very
dangerous to initiate a new long position too close to that
area and if you were already long from a lower price this area
would be a good place to take some profits.
Figure A: Five minute bar chart of UBET on
6/20/03
Figure B: Daily Chart of UBET
In summary,
if you are new to charting, start looking at charts with the
intention of identifying support and resistance. When you are
evaluating a potential trade, make sure the major resistance
is either far enough above you--or it’s even better if it’s
below you! |
Geoff will answer your questions in
future columns. Please e-mail your questions to geoff@marketgauge.com |
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