Tape Reading 101
Like all trading techniques, tape reading is not 100% reliable, but I will
trust my gut over a chart pattern any day. Nonetheless, tape reading
failed me in a trade this morning - I have no regrets (kind of) because more
times than not, I will use these subtle signs to exit a trade long before I am
about to get roughed up. Let's get right to the trade.
As you know, I have been doing a lot of
Rubber Band Trades recently as
they have been very robust. This morning, with a weak overall S&P and
Nasdaq market, I was looking to short the stocks that were up a lot and were
exhibiting "overbought" characteristics. A handful of stocks at the time
were filtered out by my software, stocks like (RIMM | Quote | Chart | News | PowerRating), (SNDK | Quote | Chart | News | PowerRating) & (ESRX | Quote | Chart | News | PowerRating).
ESRX was
the one that stood out the most, I though it was a perfect short set-up.
1. Overbought stochastic (>90) as well as a bearish stochastic
divergence (chart above)
2. A break to new day lows with stochastic confirmation on the S&P's
(chart below)
You cannot ask for much more in terms of a high-probability set-up.
I went short ESRX at 62.16, while it dropped initially to about 62.12, it
quickly became obvious that there was a buyer as the 62.12-14 bid was being
refreshed each time it was hit. This is the first sign that while you may
have timed the market and even the stock properly in terms of the technicals,
there was a buyer standing in your way regardless of the weakening market.
Only this thought should occur in this situation:
"OK, I am short one of the strongest stocks on the board right now, the
market is falling away, ESRX is not, and there is a persistent buyer at
62.12-14. When the market stops going down, I will likely be in big
trouble."
If a stock is not going down when the market is making day lows, you have to
assume it will jump higher (higher than most other stocks) when the market does
turn back up or at least stops going down.
I had no choice, I waited as patiently as possible but once the downward
momentum in the S&P's faded, I covered ESRX for a 1 penny loss. I felt
pretty good about my decision.
What happened next was not only unforeseen, but a bit frustrating.
The lesson: it was the one time out of the previous nine times that
logic and observation failed. Typically if you ignore the signs mentioned
above in terms of tape reading, the trade would have gone against you 90 cents.
You always have to trade your game plan.
As always, feel free to send me your comments and questions.
Dave
Dave Floyd is a professional FX and stock trader based in
Bend, OR and the President of Aspen Trading Group. Dave's approach to FX
combines technical and fundamental analysis that results in trades that fall
into the swing trading time frame of several hours to several days.
