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"Trading the Fallen Angels"
by
Jack Hutchison
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I've had numerous requests to expand on one of my trading strategies for
short term position trading of equities which I call "Trading the Fallen
Angels".
I've over 30 years of trading experience and I've seen it all. Bottom
line? Ignore the hype and stick to the basics. Here are some of the
basics.
My overall trading strategy is structured in a pyramid fashion, i.e. the
bulk of my capital is in a no load junk bond fund which is switched about
once a year into money market depending on prevailing interest trends . . .
if down or flat - hold; exit to money market on rise in interest rates
signaled by my software. The second tier is in short term position trading
addressed below, and the last tier and highest risk (smallest amount of
capital) is used for SOES trading. Each tier complements the other as
explained below.
I have a number of goodies in my toolbox that I use and can recommend.
These include:
TradeStation 4.0 - real time intraday charting and signal alerts
SuperCharts 2.1 - end of day charting and signal alerts
Bonneville data feed - real time
TeleScan - end of day data feed
Nature's Pulse - market timing signals
TeleChart 2000 - data feed for Nature's Pulse and excellant market
commentary
PCQuote - NASDAQ real time quotes at Level II and Dow Jones News & Alerts
Investor's Business Daily
Internet
Since I am and active SOES trader, I am more savy with NASDAQ stocks,
although "Trading the Fallen Angels" is readily applicable to listed stocks
as well.
Here is the blueprint:
At least a half hour prior to the opening bell, review the Dow Jones Hot
Stocks and Earnings Surprises. Cull the list of candidates to familiar
high growth high flyers over $10/share that trade at least 250,000 shares a
day - preferably 1,000,000 per day. Avoid stocks with ridiculous bid-ask
spreads, e.g. more that 1/4 point.
Read and UNDERSTAND the news text to determine is there is anything
fundamentally wrong. Ignore the brokerage house recommendations and
changes thereof - they merely follow the trend, and this strategy is
COUNTER-TREND and requires cojones. Take particular note of the stocks
that have been growing at over 100%/year and have slightly missed the
wisper earnings number. The Market Manipulators are gonna whack em good.
Hot Dang!
If you do not have access to SelectNet quotes prior to the opening, CNBC's
Joe Kernan talks about the "Debacle de Jour" every day and will often cite
the price of the issue trading under SelectNet/Instinet and the First Call
Earnings Estimates.
You have now found a great growth stock that has instantly became extremly
oversold and represents a potentially great buying opportunity. It never
hurts to call the company and request an investors package for future use
and general info.
So much for fundamental analysis, on to the technical.
Download and bring up the daily chart. Note the price history. Has it
been in a strongly rising trend over the last six months?
Find the recent High and Low Pivot Points using Nature's Pulse, your
charting software, or old fashioned arithmetic. Project the Target Price
based on the lasted cycle swing using Fibonnacci Numbers of 1.38, 1.62,
2.0. Find a previous bottom on the chart, if there is one. Amazing. The
Market Manipulators have taken the stock down to a previous low, or
Fibbonacci number even before a single trade has taken place! Cautionary
note: look for alternate Target Prices below current trades.
This is your setup for an entry point.
Prior to the Opening, call your broker and ask him to bid the stock on
SelectNet at the current ASK price with a Day Limit. Read that sentance
again. The stock will be crossed down on SelecNet and the Ask will be less
than the Bid. If available, watch your Time & Sales data to see where the
stock is currently printing trades, or ask your broker. Don't bid any more
than the current prints. If he doesn't know what you are talking about -
you need a fresh horse. Call Fidelity Spartan or PT Discount. (SelectNet
trades may cost you about $0.02/share extra commission.)
Confirm your fill prior to the Opening. If not filled on SelectNet, which
may often happen since SelectNet orders are not required to be filled by
the NASD or the SEC, you may elect to enter a Day Limit order right after
the Opening. Don't forget to cancel the SelectNet order.
Be patient. There will be a massive influx of orders and the Daily Volume
may well exceed 10X normal for the stock. When all the panicked sellers
are out of the way the stock will rise, often dramatically to recover 50%
of its loss, or more. This is your Target Sell Price.
In the event the stock drops below the Fibonacci Support or Prior Low, exit
immediatly. You can always buy it back often at a lower price - see
alternate Target Price above). If you are using a deep discount broker,
your commissions will be negligible. If not, you are wasting your time
here on this site.
You should always be aware of the overall market trend and potential market
Pivot Points. This is where Nature's Pulse comes in handy. Obviously,
trading the Fallen Angels works well in a bull trend. However, I have
found the best opportunties just prior to a market bottom.
Prior to entering any trade, you should know where you are going to exit,
and this includes your Stop. You should have previously calculated your
Target Price and your Stop. You will often have a great follow thru day,
so continue to hold until you either reach your Target Price or are Stopped
out when the stock rally fails by establishing a daily Lower Low.
Here are some recent trades that worked quite well. You should carefully
review each chart and perform the analysis above.
CTXS
CLFY
APAC
MCAF
TKLC
BAANF
CIEN
RMBS
PCMS
Let's look at PCMS:
The April Low was 12 3/8 and the October High was 28 3/8. I calculate the
Fibonnacci retracement at 19 1/8. The stock started trading on SelectNet
at 20 1/2. After the massive influx of orders, the stock rose slightly and
subsequently fell to 19 1/2 - close enough to the entry Target Price to
enter the trade using a Day Limit order. I got filled at 19 7/8 and the
stock closed near its daily high of 22. I expect it to gap up today and
subsequently rise to my Target Price of 24, which is a 50% retracement from
the record high to Fridays low. If the market action is strong at the
time when the stock reaches my Target exit point, I will reconsider selling
and hold with a very tight stop.
That's it for now folks. Good Trading
Jack Hutchison
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