Today's Trading Lesson From TradingMarkets

The trend is your friend. I have traded it, used it and coaxed profits from it. To the charge of being a trend-following moron, in the words of my friend Dave Landry: "I plead guilty." However, what does a daytrader do when the market is suffering through a day that can't seem to find a trend, and chops around? Following the trend is great, but people -- long before I was around -- figured out the market only trended around 60% of the time (30% up and 30% down). What do we do for the other 40%? Sit out? I suppose that could be an option, but why would you want to sit out when there are ways to pull money out of markets like these, if you know what to look for? In this lesson I will show you the systematic plan of attack that I use for finding these hidden gems when the market is lacking momentum.

Being "Where the Action Is"

For a daytrader, this is always of paramount importance, but it becomes even greater when a choppy day comes up. Many who have read prior lessons from me know I like to look at stocks with a 3-month relative strength ranking of 80-99 for long side candidates and a 3-month relative strength ranking of 1-20 for possible short issues from the TradingMarkets.com Stock Scanner. But on days that can't seem to decide where they want to go, intraday relative strength or weakness is more important. Why is a stock up 2 or 2 1/2 points, when the market slowly grinds? It could be on news, could be due to an analyst upgrade, etc. It does not really matter why. The fact that it is moving higher or lower while the market is undecided is telling you something.

How Do You Spot These Rockets When They Launch?

The TradingMarkets.com Nightly Daytraders Report

Every night, a new feature on the TradingMarkets.com site hands you names with the potential for continuation to both the long and short side. It is our new Nightly Daytraders Report, and it is full of stocks that could prove fruitful the following morning. In it, we rank stocks with high short-term relative strength that closed in the top of their range, suggesting follow-through over the next one to three trading days, as well as equities with weak short-term RS that could continue to the downside. In addition, we point out stocks with high RS that showed a last-hour surge in volume, as well as stocks ending the session in Slim Jims that could develop into another trade the following day.

What this gives you as a trader is a powerful list for you took look at, when you sit down at your trading desk the following morning. While certainly not all these names follow through, this gives you an important heads-up as to who the leaders and laggards may be, when the momentum awakes from the doldrums.

Here, Computer Sciences Corp. (CSC) appears on the list, as it has a three-month RS rating of 84 on Nov. 2, ends the day in a Slim Jim and exhibits an expansion breakout on a surge of more than 500% of the average daily volume. The following trading session, the stock explodes to the upside -- giving the daytrader an explosive, profitable move.

CSC runs up more than 2 1/2 points right from the get go, after another momentum gap higher.

Another example from the Nov. 2 list, XL Capital (XL), makes the cut by holding a three-month RS of 87 and closing in the top of its range.

The stock gaps up in the following session, but then proceeds to head straight down. However, it then rallies over an angular triple top/triangle and runs up 1 1/2 points to its intraday high.

The stocks from this list do not always move right away, but if you have the patience and the focus to monitor them throughout the day, you will be ahead of the game when they decide to make their move.

TradingMarkets.com Market Bias Indicators

Another tool that can help you gain an edge in markets with unsure or undecided chart bias is the Market Bias Indicators. Here you will find VIX reversal signals I, II, III, V and VI, the McClellan Oscillator, TRIN Thrust, CHADTP and the TradingMarkets.com Proprietary Momentum Index Indicator. These signals are updated nightly and give you a good indication as to the probable slant to next day's trading. These indicators are not stand-alone signals and should not be traded as such, but they do give you a solid platform from which to approach the following day, particularly when you get multiple signals pointing in the same direction.

Spotting Momentum Intraday

One of the quickest ways to spot stocks moving is to utilize the point gainers and point losers feature in your charting package. Most charting software has this feature to alert you to the biggest point gainers and losers, either by exchange or simply all together.

(Biggest point gainer and loser quote windows. Courtesy of Quote.com)

These windows will show you what is moving up or down, immediately. From here, you simply go to the charts and see if a particular stock is setting up for a likely entry.

Here, Engineered Support Systems (EASI), is showing three consecutive higher closes on the daily chart when it appears in the quote window on Oct. 30 and gives the daytrader three potential entries -- trade through above the prior high, a pullback and a Slim Jim.

Cabot Microelectronics (CCMP) is another big mover that appears in the quote window on Nov 1.

The Nasdaq Composite ($COMPX) is choppy and undecided early, then rallies upward for a solid trend day. This gives the impetus to push CCMP higher out of its late-afternoon Slim Jim.

Not For The Faint Of Heart

It must be said this method is not without risk, and any of these methods utilized should be in conjunction with tight stop-loss protection. The position should move in your favor almost immediately. If it does not, get out. When trading in a choppy environment, flexibility is the key. You will get stopped out of some positions and be forced to re-enter, sometimes in the other direction.

Here the Nasdaq 100 ($NDX.X) can't decide which way it wants to go. It forms a Haggerty 1-2-3 top, yet seems to just drift sideways in a channel. About 90 minutes later, it breaks out above the channel/triple top, but not before making one last bleed back into its range. Traders who recognize this action can profit when the market finally gets its sea legs.

In conclusion, there is no reason to sit on the sidelines when the indices as a whole are undecided about where they want to go. If you do your homework, prepare yourself the night before, have a plan when you sit down at your desk in the morning, and focus on where the action is during the day, you are on your way to being successful. When you know where to look, you can uncover stocks moving up and down on any day. With proper money management, you lessen risk while increasing your equity curve on a difficult day.