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MOMENTUM PLAYS
Just as the teams contending in the Super Bowl try
every tactic in their playbooks to gain a surge of momentum against
their
opponent that can lead them to victory, so, too, in the markets we
look
for momentum in our trades to carry us to victory in the form of
profits.
The key is to recognize that a stock or industry or index is
gaining momentum in time to ride the wave for short-term gains on the
long
side or the short side.
The reasons for momentum plays are varied and plentiful.
News can certainly move a stock as long as it generates the
enthusiasm
that brings more and more players into the action. Stock split
announcements, new products, and mergers often do the trick.
Anticipation of news is another factor. Will a company be the first
to
market with a new product or technology, or is the product/technology
going to be a market leader?
Buzzwords help a lot. This was big in the 1990s when money flowed
from
"wireless" to "business-to-business Internet" to "networking" and
stocks
in each sector piled up huge gains. Sometimes there are historical
reasons or
no reasons at all.
To keep the bandwagon rolling, there must be excitement and volume.
There
are thousands of good companies, but if Wall Street ignores them,
they
will languish. The firms that get the attention also get increased
buying.
The pressure on holders of short positions can be overwhelming.
Eventually,
the short sellers rush to "cover" their positions by buying the
underlying
stock and the resulting "short squeeze" adds to the upward momentum.
Remember, a stock that is suddenly out of favor or receives bad news
can
be a momentum play to the downside. Shareholders run for the exits,
short
sellers add to the fire sale and the price plummets.
It's difficult to pick the beginning of a momentum run and it's
costly if
you enter a trade too soon and are wrong. The best approach is to hop
in
while the run is happening and then hop out when the momentum appears
to
be losing steam. Try to take your slice of profits out of the middle
of
the move and you're likely to be rewarded.
http://clix.to/wallmann
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