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Dave Landry:
I've done that before on ocassion with strategies such as "stepping in front of size". However, in general, I like to see it take out the prior day's high.
Submitted by leapfrog:
Are you entering on stops or do you wait for a trade through your entry point and enter on a market order.
Dave Landry:
I've done both. I do like to see markets open first.
Submitted by epkes:
When placing an advanced order to enter a stock above the prior days high which type of order would be best, stop or stop limit?
Dave Landry:
My general rule of thumb is to never "limit" myself out of a trade I really want to be in. In fact, in the futures market, I can only remember a few times where I used limit orders.
It all depends on how bad you want to own the stock. If I want to be in it really bad then I use a market order (or stop). However, if the stock is very volatile you have to be more careful.
Would you consider the cup and handle pullback more explosive than a regular pullback? Jonny
Dave Landry:
I always like to see a bigger picture pattern at work. Cup and Handles are one of my favorites. So in general, I do perfer something like a cup and handle. However, many stocks on a mission, often pullback numerous times as they procede to double and triple.
Submitted by Everett:
Your "Stock Market Trading Outlook" has become required reading for me as I've found your observations to be very accurate. Today's example is Audiohwy.com that you featured yesterday. The fact that it never crossed the 1 to 2 bar line to strengthen a move upward saved me money! In other words, your advice was right on!
Dave Landry:
Thanks, you have no idea how good that makes me feel. I have recently heard that there are people out there that blindly buy stocks mentioned in the commentaries and/or indicator lists without any plan.
Submitted by Everett:
When you say "deeper pullbacks lead to shorter "kneejerk" reactions", do you mean the reversal to the upside is quicker and steeper, but not as long lasting as those associated with milder pullbacks?
Dave Landry:
Yes. Conceptually, I think that people are trapped on one side of the market and then dogpile in/out to make the "kneejerk"...but often the damage has already been done (i.e. the bigger picture trend has somewhat been violated).
Submitted by Moderator:
Dave Landry:
I would like to think everyone for joining me here tonight. You guys (and gals) asked some really great questions. It makes me proud to know that tradingmarkets.COM has such an audience. Thanks and good night!
How much weight do you give to the overall market as compared to the individual stock you are trading...ie; strong stock in a tanking market...and what indicators do you find helpful to guage overall market strength?
Dave Landry:
I think there are always good stocks in bad markets and bad stocks in good markets. I like to use a the market bias indicators when comming into the day. That way, the bigger picture market action will help me out.
Submitted by BONSER:
When using turtle buys, implosion lists, etc. etc., are these intended for day trading or for longer time frames?
Dave Landry:
It depends. For instance, the energies have been on the momentum list for quite some time and have offered buying opportunites that are more than just day trades. The turtle soup set-ups tend to mostly be day trades but ocassionally turn into something larger.
There are "short" pullback lists on both the stock and futures indicator pages: The Pullback Off Lows lists.
How do determine if the stock is in a pemproary pullback versus just being in bad favor? In other words, do the fundamental strengths and sector favor criteria come into play?
Submitted by Everett:
Dave,
Dave Landry:
This forum will be archived shortly for easy review.
Great question. Taking a look at the sector chart is a good idea. I donít factor in any fundamentals into my trading. My theory is, by entering above the market, I often avoid a stock that is going out of favor. False pullbacks sometimes actually make good short candidates.
This concludes our Live Forum. Thanks for all your questions, and thanks to Dave Landry. Be sure to check out Dave's commentary every day. (He'll also be hosting another Forum soon.)
Submitted by Trial User:
When do you enter a position on a pullback?
Dave Landry:
Above the dayís high is a good place to start. Depending on how the stock/commodity is trading, Iíll often use up to a 2 or 3 bar high to enter. Sometimes this keeps you from getting into the market too early.
Do you look at any criteria that would make one pullback look like a better candidate for a reversal than another?
Dave Landry:
The idea behind trading pullbacks (from the buy side) is trading with the MAJOR trend is up and entering while the minor trend is down. So when you say reversal, Iím assuming you mean the pullback (i.e. the minor trend down). You want to wait until this minor trend gives some sort of signal that it has turned back up. Therefore, those stocks that close well, may be in the processing of turning back up.
Submitted by kena:
Where do you typically place stops when trading pullbacks?
Dave Landry:
Dave Landry is director of research for tradingmarkets.COM and president of Sentive Trading, a money management and research firm. He writes the Futures Trading Outlook and Stock Market Trading Outlook every night. Dave, who holds a BS in computer science as well as an MBA, entered the trading industry after a successful career in management information systems. Always fascinated by trading, in 1988 he embarked upon an in-depth analysis of the financial markets using technical and statistical analysis. In 1995 he decided to devote himself full-time to the markets, and in 1996 he became a Commodity Trading Advisor (CTA) and founded Sentive Trading. Mr. Landry's trading articles have been published in "Technical Analysis of Stocks and Commodities" magazine and he has authored a number of trading system manuals, including the "2/20 EMA Breakout System." His work has been included in several books, including "The tradingmarkets.COM Guide to Conquering the Trading Markets," "Connors On Advanced Trading Strategies," and "Beginners Guide to Computerized Trading." Today, Dave will begin the forum discussing pullbacks. To ask a question, simply type it in and hit the "Submit Question" bar--that's all there is to it. You also can create a short subject heading for your question in the title space (it helps if you do). Past questions appear in the left-hand portion of your screen for easy browsing.
This is a moderated forum, so we ask that you respect the other guests and our featured speaker. We try to get as many questions as we can, so please be patient. Shortly after the forum is completed, it will be archived and available for review.
Below the prior day's low is a good place to start. Depending on your trading style, you might have a certain dollar amount you want to risk. I know that Jeff normally only risks a maximum of 1 point on most positions. If you're looking for a bigger move, (i.e. that may take several days to develop) you might consider a 2-3 bar low. No matter what you're style you should look to tighten your stop once the position becomes profitable.
Submitted by Moderator:
Welcome to the tradingmarkets.COM Live Forum, featuring Dave Landry.
Submitted by Everett:
When you say "after or two or three bar high" for an entry point, do you mean two or three up days in succession?
Dave Landry:
Not necessarily up days but taking out prior highs. Say ABOV has a high of 129 today. You want to see the stock at least take out that high tomorrow before attempting to enter.
Submitted by cmonroe:
So you have this strong stock pulling back on low volume, then turning back up. You enter. Now where do you place your stop (or do you just use alerts and mental stops?)
Dave Landry:
I'm Mr. Mental Chatter when it comes to mental stops and watching a screen. By that, I mean, in my head Iím thinking: it's going up great!, shoot now is dropping, oh it's back up again, shoot it's coming back down. I'm not that good, I put in my stop and get on with my life. Below the prior dayís low or a fixed dollar amount is a good place to start.
Submitted by Moderator:
Dave, briefly define pullbacks and why you trade them.
Dave Landry:
Certainly, pullbacks are strongly trending stocks (or commodities) that begin to do just that, pull back. For instance suppose a stock has been in an uptrend from 40 to 70, it then begins to trade lower over the next few days, say 69, 68, 67,66. This is normal profit taking/distribution and is actually healthy for the market. However, you donít just buy because it is cheaper, you wait until price turns back up (suggesting the longer term trend has resumed) to enter. This provides a much safer entry point then simply buying because the stock is going up.
Submitted by petpieve:
Why would you enter on the days high if you want the stock to go up?
Dave Landry:
If a stock is in rally mode, it should have enough strength to take out the prior day's high. If it canít muster up enough steam to take out the high, then itís probably not worth trading.
Submitted by Lauren:
Once a stock has reversed, how do you time your exit? Do you look at the magnitude of similar historical moves in the stock to determine how much gain to expect, or do you use take profits after a certain number of points, or by some other criterion?
Dave Landry:
"2 for 1" money management (see Connors Advanced Trading Strategies)is also a good idea. Essentially, once your trade exceeds your initial risk, you exit half and move your stop on your remaining half to breakeven. This, barring gaps, ensures you at worst a breakeven trade and gives you the possiblibity to capture a much larger gain. If the market continues to move in your favor, then trail your stops.
You should always take some money off the table during parabolic moves. If you're lucky enough to catch a hugh move, pat yourself on your back and call your broker. I know when I take out my calculator and stort thinking about the stuff I could buy with the money its probably a good time to lighten up.
Is there an "average" time period to watch for a pullback? In other words, if a stock pulls back for a long period before beginning to move back up, does it take the impetus out it being a true pullback move?
Dave Landry:
I like to see 3 to 6 bars in a pullback. If the pullback is very shallow then more bars are ok. But yes, you are right, the longer the market drifts after a strong move, the weaker the original trend becomes.
Submitted by lil bl:
What do you mean by entering above the market?
Dave Landry:
If you are looking to buy, place your order ABOVE the market. That way, you are at least temporarily, trading with the trend.
Submitted by Moderator:
How do you find pullback?
Dave Landry:
You mentioned tighter stops on profit positions. I normally set initial stops at 7 to 8% below my purchase cost and have been attempting to follow profitable trades up at the same rate below its newly elevated price. Are you saying it is better practice to make the stop window narrower as the profits increase?
Although it may sound self promotional, I actually use tradingmarkets.COMís pullback lists. I wrote the code for it and know how it works. It does a good job of finding pullback candidates. For obvious reasons, I canít share the code, but itís not rocket science. Basically, it looks for strong stocks, that have pulled back after hitting new highs (or lows for the list on the short side). Also, I have found that once a stock or commodity begins to make any momentum (or implosion) list, including the new highs/lows list, itís worth watching for a pullback entry over the next few days.
Submitted by Everett:
Dave,
Dave Landry:
I think you have the game figured out. The only thing I would suggest is that you tighten stops very tight and/or take profits during parabolic moves. For instance, if you caught NTBK when it went up 75 1/2 points....lock that in!
Submitted by pinto552:
I TRADE FUTURES AND HAVE FOUND FIB RETRACEMENT LEVELS TO BE GOOD ENTRY AREAS, I REALIZE THIS GOES AGAINST THE GRAIN SOMEWHAT, BY NOT LETTING THE TREND RESUME, BUT YOU DO GET BETTER TRADE PLACEMENT AS A TRADE OFF. ANY THOUGHTS PRO OR CON.
Dave Landry:
I'm not that good at fading a trend, even if the minor trend is down. I like to see some sort of confirmation (trend resumption) at the cost of increased slippage.
Submitted by Moderator:
He's referring to the highest high (or lowest low) of the last two or three price bars.
Submitted by kaas:
You mentioned comparing a stocks action to it's sector for confirmation. tradingmarkets publishes a sector strength list, but the sectors are not identified other than symbols. Wouldn't it help to have these sectors better identified?
Dave Landry:
Put your mouse over the sector symbol, then look to the bottom of your screen (where it normally shows you what the link is), and you will see the name of the sector.
Submitted by PlayToWin:
The past couple of days the internets(ie: AOL, AMZN, DCLK) and the internet brokerage (ie: AMTD, NDB, EGRP, JBOH) have pulled back from 30%-45%. What view do you have on this segment and how would you approach it? They appear to be out of favor and heavily volatile.
Dave Landry:
I would approach it on a stock by stock basis. These stocks are pretty scary right now. I would tread lightly. Also, many of these closed poorly, I would wait for some sort of sign that they are turning back up.
Submitted by mmorel:
Is there a limit to how deep a pullback should be?
Dave Landry:
Ideally, I like to see a stock correct between 5 and 10% off its highs. If its a high flying internet company, I might be more lenient and go as high as 15% to 20%. Iíve found shallow pullbacks often lead to longer term continuation moves and deeper pullbacks provide more of a short term ìkneejerkî move. I havenít quantified this, itís just through observation.
Submitted by DayTrader:
Once the position is profitable, how do you select your exit point?
Dave Landry:
See question re: 2 for 1 money mgmt. Also, as mentioned, I try to take something off the table during parabolic moves.
Submitted by waves:
what indicator do you look for the most before the open to get a feel for the market that day
Dave Landry:
I always have a market bias coming into the day. The night before, I look at the indicators on the market bias page, S&P/Dow/OEX charts etc. I have a pretty good idea what the bias should be. I then get up early and watch globex futures. Often they will provide clues as to what the market might do. For instance, if they reverse then you might look to go the opposite way. Also, if they are up or down sharply, wait for the cash market to open for say, 15 minutes or so before jumping into the market. This might keep you out of what Kevin and Jeff call a "specialist delight".
Submitted by Mitch2:
Dave, What if your stock gaps on the open? Do you wait until it pulls back to the previous high before you buy?
Dave Landry:
It depends, you have to take it on a case by case basis. If the gap is within reason, then you might go with the gap. If it is somewhat excessive, it could come right back in as soon as the buyers are d sucked into the market.
Submitted by jed212:
Should the reversal involve a minimum number of bars to be valid? In other words is there a minimum time period required for the minor trend to establish itself before it can reverse again and be a good entry point? Thanks for sharing this information with us.
Dave Landry:
Good question. Jeff has shown me that stocks on a serious mission only pause for 2 days. For me to call something a "pullback", I like to see at least 3 days (i.e. 3 lower highs). One other point, if a stock runs up and makes new highs but reverses (i.e. tails off), I ofen consider that the 1st day of the correction.
Submitted by Paul:
Dave, What about buying options on pullbacks? What do you see as their advantages and/or disadvantages?
Dave Landry:
What you may consider, (and I don't do it), is to buy options that are 1 or 2 strikes into the money. This will take off some of the extrinsic price. Again, I'm not an options expert so you might want to ask Dr. Pisani.
I don't often buy options. You have to look at the implied volatiltiy of the options, that is how expensive it is. Then you have to think, is the stock really going to move XX points before this option expires? Seems to me like they are almost always too expensive.
How does the pullback scenario work for intraday trading? I try to look for the same reasoning but am not sure it works jonny
Dave Landry:
I belive that a pattern is a pattern regardless of time frame. I suggest that you try observing what would happen if you would enter a strong stong during an intra-day pullback (i.e. have both the longer term time frame and shorter term time frame working for you). I think you might be surprised.
Submitted by CAT:
Is there any average as to how long you are in your trades? When you tighten up your stops after the trade is profitable, how close do you normally take them? I assume most of your trades are stocks not commodities.
Dave Landry:
I normally let the market take me out. I do trade both stocks and commodities. In the S&P futures and the Dow Futures, I normally trade between 1 and 3 days. The leverage often gets me out much quicker. In other commodities, if I have a large profit, I might try to hang on a little longer. In stocks, I try to stay in 2-3 days if the market cooperates.
Submitted by uptick:
How do you identify trend? What time frames do youtrend defined in?
Dave Landry:
As far as time frames, I find net move more important that the time it took the stock to move. For instance, a high flying internet stock may make a huge move in a few days, then pull back.
ADX and RS do a good job. However, I personally find them to be lagging indicators. They do a great job of identifying stocks that have been in longer term trends (which is useful ) but lag too much to catch a shorter term trend (i.e. a stock that recently broke out and is in the early phases of a trend). Iíve experimented with trying to develop my own trend indicators but have found that thereís nothing better than the human eye. Also, to find stocks that may be in early trends, look to new highs/lows and the Proprietary Momentum/Implosion list. This will pick up trends earlier than any trend indicator I know of.
What role does volume play?
Dave Landry:
First and foremost, price pattern always takes precedence. I would never rule out a pattern because the volume isnít what it ìshouldî be. Ideally, I like to see the volume dry up during a pullback. If the stock has started to turn , that is sell off and then recover to close well, then I like to see volume increasing. A hook up would be a good example of a day when I would like to see heavy volume (i.e. gap lower on the open and then rally and close at/near the high for the day).
Submitted by Trial User:
When does tradhard.com begin to list pullbacks? Is it after a couple of days or an early alert to start watching the stock?
Dave Landry:
Essentially the stock has to pullback about 3 days or more. If you want to get a jump start, then you have to watch the new highs and momentum lists.
Submitted by epkes:
What determines the ranking (1,2,3,...) of a stock listed in the Pullback List? My guess is Relative Strength of the stock.
Dave Landry:
Your guess is pretty close.
Submitted by Moderator:
Parabolic moves are very accelerated, dramatic price moves.
Submitted by Jonny:
if the pullback goes to -4 or -5 pts is that a trade that you dont take because of the drop? Jonny
Dave Landry:
I have observed (but not quantified) that shallow pullbacks lead to longer term moves and deeper pullbacks lead to shorter "kneejerk" reactions.
It depends on the stock and the set-up, on a $100 dollar stock, that's only a 4-5% pullback which is very acceptable. Now if a $20 stock drops that much that's 20-25%. Also, volatily of the stock makes a big difference, as you know, internet stocks drop 20% and then bouce right back. So on less volatile stocks look for shallower pullbacks and vise versa on more volatile stocks. As a general rule of thumb, 10 to 15% in a pullback is acceptable.
He's referring to the number of price bars in a move. A daily bar chart, for example, shows each day's price activity as an individual vertical bar.
Submitted by Everett:
Excuse my ignorance here, but when you say "wait for cash market to open if the Globex futures are up or down sharply", do you mean wait and see how the first 15 minutes of actual open market trading plays out, i.e., from 9:30-9:45 AM Eastern time?
Dave Landry:
Yes, actual open.
Submitted by Moderator:
Do you use any other indicators?
Dave Landry:
My advice is look for the juice, the juice IS good!
Yes, volatility. Ever since I read Connors/Haywardís ìInvestment Secrets of a Hedge Fund Managerî, Iíve been inspired to incorporate volatility analysis into the markets. The best pullbacks come from highly volatile stocks (i.e. those on the Trading Where The Action Is List). This is not without risk. Those stocks are also the riskiest stocks to trade. However, the rewards far outweigh the risk. This is one area of research I would like to quantify at some point in time. I believe that you could probably trade only the most volatile stocks on pullbacks with strict money management/risk control (and I do emphasize strict MONEY MANAGEMENT) and probably earn a good living. Jeff and I call it ìThe Juiceî based on a Saturday Night Live skit involving a Greek restaurant famous for itís juice. Anytime one of us finds a highly volatile stock in a pullback (or other pattern) the phone conversation begins with (imitating the chef character in the skit): ìHey, you like-a da juice?, da juice is good?îÖ.
Do you employ any technical indicators, such as MACD or stochastics, to try to predict pullback movements and recoveries or is it simply a game of watching price movements and gauging day highs and lows?
Dave Landry:
I like looking at charts, I don't like being a slave to any indicator like, oh the stochastic has to be here or wait until the MACD is less than xxx. After a while you get a good feel for it.
Submitted by trtucker:
Would the "handle" on a cup-and-handle pattern show up on the pullback list?
Dave Landry:
Great question. After all, a "handle" is really a pullback isn't it? Sometimes they will show up on the list. However, what usually happens is that there are enough stong stocks to squeeze out the cup and handle patterns.
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