Day Trader column for September 4 – 2012

Another weekly pivot point to the downside last week as the All Ords refused to move above the long term downtrend line as discussed last week. It is also worth noting the move up last week stopped and reversed when it touched the short term uptrend line drawn from August 2011 low. After scanning the market at the weekend it was noticeable the number of stocks priced at more than one dollar which have now formed or will form five point reversals if they move above recent highs again. When looked at in conjunction with stocks which are in established downtrends like BHP, RIO and Newcrest (NCM) it is hard to become enthused with our market.

We will just have to wait for the market to work its way into the corner of the two converging trend lines I spoke of last week and then see which way it breaks.

Some stocks are still moving up and many of them are in the energy, health care and internet sectors, but the volumes involved are not sufficient for me to trade them.

Some go for days with little or no volume then move on a few thousand dollars and when an entry signal is formed my stop loss would be twenty and thirty percent in some cases. Far too much risk for my liking.

Now back to the entry signals or triggers I was discussing last week.

The first entry signal to look for in a sideways pattern is the fourth day of narrow range low volume trading. I would only use this trigger in a strong uptrend as it is the highest risk entry for this pattern. The high risk is that there is a strong possibility it may break below the sideways pattern and continue falling. On the other hand I would place the stop at the low of the sideways range and as this range is by our definition very narrow, the loss in the event it did fall would be small. So we have high risk in that it may not move up but low risk if we buy and get stopped out.

The next entry for this pattern (after the pattern has been established for four or five days) is either a day where the price opens at the low of the range and closes at the high of the range or a day of a big volume increase.

In this case we have a much higher probability the price will move up and still have a low risk stop level.

The next signal is a close above the trading range. Again an even stronger probability of a move up (ie. less risk) but as the stop is still at the bottom of the trading range the loss in the event of being stopped out is greater therefore more risk.

The final buy trigger for this pattern is to wait for the break above the trading range and a slow pull back and a daily pivot point to the upside.

So we have the highest probability of a move up and a low risk stop. The problem is the price may move up a long way before a pullback and you miss the trade.

I guess you pay your money and take your chances.

There are still a couple of spots available for my September 22/23 workshop. For details on the workshop and to learn and gain hands on practice in my methods goto:

Portfolio Position

Cash $290,667

Shares Nil

Total $290,667

Starting capital $50,000 in July 2006